UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

þ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June~~December 3031, 2012

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE

EXCHANGE ACT

For the Transition Period from _______ to _________

001-34123

(Commission File Number)

CHINA-BIOTICS, INC.

(Exact Name of registrant as specified in its charter)

Delaware

98-0393071

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer Identification No.)

No. 26 Orient Global Headquarter

Lane 118, Yonghe Road

Zhabei District, Shanghai 200072

People’s Republic of China

(Address of Principal Executive Offices)

Telephone number: (86 21) 5834 9748

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No þ

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller

reporting company)

Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No þ

As of ~~December~~February 2413, ~~2012~~2013, 22,150,200 shares of the registrant’s common stock were outstanding.

TABLE OF CONTENTS

		Page
PART I - FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS	3
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	21
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	3237
ITEM 4.	CONTROLS AND PROCEDURES	3237
PART II - OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	3540
ITEM 1A.	RISK FACTORS	3540
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	3641
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	3641
ITEM 4.	[REMOVED AND RESERVED.]	3641
ITEM 5.	OTHER INFORMATION	3641
ITEM 6.	EXHIBITS	3641
SIGNATURES		3943

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

CHINA-BIOTICS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts expressed in US Dollars)

CHINA-BIOTICS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THE THREE AND NINE MONTHS ENDED ~~JUNE 30~~DECEMBER 31, 2012 AND 2011

TABLE OF CONTENTS

Unaudited Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets as of June 30, 2012 (Unaudited) and March 31, 2012 Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Income for the three months ended June 30, 2012 and 2011 Unaudited Condensed Consolidated Statements of Changes in Stockholders' Equity for the three months ended June 30, 2012 Unaudited Condensed Consolidated Statements of Cash Flow for the three months ended June 30, 2012 and 2011 Notes to the Unaudited Condensed Consolidated Financial Statements

Unaudited Condensed Consolidated Financial Statements	4

Condensed Consolidated Balance Sheets as of December 31, 2012 (Unaudited) and March 31, 2012	5

Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Income for the three and nine months ended December 31, 2012 and 2011	6

Unaudited Condensed Consolidated Statements of Changes in Stockholders' Equity for the nine months ended December 31, 2012	7

Unaudited Condensed Consolidated Statements of Cash Flow for the nine months ended December 31, 2012 and 2011	8

Notes to the Unaudited Condensed Consolidated Financial Statements	9

CHINA-BIOTICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts expressed in US Dollars)

	June 30, 2012 (Unaudited)			March 31, 2012
	December 31, 2012 (Unaudited)			March 31, 2012
ASSETS
Current assets
Cash and cash equivalents	$	5068,~~669~~450,~~316~~222		$	70,086,074
Accounts receivable, net		3029,~~607~~886,~~277~~710			33,392,474
Inventories		2,~~182~~776,~~161~~965			1,942,549
Deposits - short term		2366,~~101,210~~603			1,114,367
Prepayments		~~464~~266,~~043~~702			356,157
Other receivables		~~137~~6,~~031~~651,553			102,530
Total current assets		86108,~~161~~398,~~038~~755			106,994,151
Loan receivable		20,~~784~~810,~~923~~652			20,753,343
Deposits - long term		3025,~~116~~709,~~186~~796			30,070,428
Prepayments for equipment and construction		34,234,650			22,007,427
Prepayments for equipment		19,895,653			22,007,427
Property, plant and equipment, net		7998,~~883~~174,~~574~~194			72,080,331
Land use rights		54,~~039~~993,~~774~~530			5,056,884
Total assets	$	~~256~~277,~~220~~982,~~145~~580		$	256,962,564
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	12,~~745~~852,~~692~~644		$	2,873,904
Other payables and accruals		56,~~655~~034,~~033~~769			5,425,821
Tax payables		31,~~479~~963,~~624~~250			33,364,611
Short term loan		315,~~170~~870,~~125~~245			3,165,308
Amount due to director		5574,~~068,731~~450			4,954,345
Total current liabilities		4757,~~119~~295,~~205~~358			49,783,989
Long term loan		~~3,962,656~~-			4,747,963
Total liabilities		5157,~~081~~295,~~861~~358			54,531,952
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value of $0.01, 10,000,000 shares authorized, none issued		-			-
Common stock, par value of $0.0001, 100,000,000 shares authorized,42,370,000 shares issued and 22,150,200 outstanding as of June 30, 2012 and March 31, 2012, respectively		4,237			4,237
Common stock, par value of $0.0001, 100,000,000 shares authorized,42,370,000 shares issued and 22,150,200 outstanding as of December 31, 2012 and March 31, 2012, respectively		4,237			4,237
Additional paid-in capital		85,~~064~~738,~~562~~454			84,727,616
Retained earnings		~~110~~124,~~251~~893,~~038~~719			108,179,075
Treasury stock at cost, 20,219,800 shares as of June 30, 2012 and March 31, 2012, respectively		(2,741,634	)		(2,741,634	)
Treasury stock at cost, 20,219,800 shares as of December 31, 2012 and March 31, 2012, respectively		(2,741,634	)		(2,741,634	)
Accumulated other comprehensive income		12,~~560~~792,~~081~~446			12,261,318
Total stockholders’ equity		~~205~~220,~~138~~687,~~284~~222			202,430,612
Total liabilities and stockholders' equity	$	~~256~~277,~~220~~982,~~145~~580		$	256,962,564

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

CHINA-BIOTICS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND OTHER COMPREHENSIVE INCOME(LOSS)

(Amounts expressed in US Dollars)

	Three months ended June 30,
	Three months ended December 31,						Nine months ended December 31,
	2012			2011			2012			2011
Net sales	$	1724,~~382~~680,~~483~~142		$	822,~~959~~401,~~225~~455		$	62,214,479		$	35,510,781
Cost of sales		78,~~278~~823,~~378~~814			48,~~482~~933,~~416~~894			23,833,844			16,656,068
Gross profit		10,104,105			4,476,809
Cost of product returns		-			-			-			7,143,914
Operating expenses:
Gross profit		15,856,328			13,467,561			38,380,635			11,710,799
Selling expenses		4,036,365			1,970,169
Operating expenses:
General and administrative expenses		3,659,096			4,650,661
Selling expenses		2,635,966			328,459			9,249,502			4,316,810
Total operating expenses		7,695,461			6,620,830
General and administrative expenses		3,390,919			3,439,934			10,994,795			11,826,124
Income (loss) from operations		2,408,644			(2,144,021	)
Total operating expenses		6,026,885			3,768,393			20,244,297			16,142,934
Other income and expenses:
Income (loss) from operations		9,829,443			9,699,168			18,136,338			(4,432,135	)
Interest expense		(145,460	)		(270	)
Other income and expenses:
Interest income		194,973			387,940
Interest expense		(198,705	)		(16	)		(477,101	)		(352	)
Interest income, net – loan receivable		776,683			-
Interest income		146,228			372,918			474,447			1,158,779
Other expenses		(102,892	)		(221,636	)
Interest income, net – loan receivable		776,233			-			2,325,218			0
Exchange gain (losses), net		8,987			(37,135	)
Other expenses, net		(131,393	)		(90,695	)		(318,705	)		(545,424	)
Total other income		732,291			128,899
Exchange gain (losses), net		(12,039	)		(15,964	)		190			(91,007	)
Income (loss) before taxes		3,140,935			(2,015,122	)
Total other income		580,324			266,243			2,004,049			521,996
Income taxes		1,068,972			41,908
Income (loss) before taxes		10,409,767			9,965,411			20,140,387			(3,910,139	)
Net income (loss)		2,071,963			(2,057,030	)
Income taxes		1,483,183			857,267			3,425,743			899,175
Other comprehensive income
Net income (loss)		8,926,584			9,108,144			16,714,644			(4,809,314	)
Foreign currency translation adjustment		298,763			(2,512,408	)
Other comprehensive income
Comprehensive income (loss)	$	2,370,726		$	(4,569,438	)
Foreign currency translation adjustment		550,766			1,021,657			531,128			439,869
Weighted average number of shares
Comprehensive income (loss)	$	9,477,350		$	10,129,801		$	17,245,772		$	(4,369,445	)
Basic		22,150,200			22,150,200
Weighted average number of shares
Diluted		22,326,563			22,150,200
Basic		22,150,200			22,150,200			22,150,200			22,150,200
Income (loss) per common stock
Diluted		22,150,200			22,150,200			22,150,200			22,150,200
Basic	$	0.09		$	(0.09	)
Income (loss) per common stock
Diluted	$	0.09		$	(0.09	)
Basic	$	0.40		$	0.41		$	0.75		$	(0.22	)
Diluted	$	0.40		$	0.41		$	0.75		$	(0.22	)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

CHINA-BIOTICS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Amounts expressed in US Dollars)

	Common Stock
	Shares		Par value $0.0001		Additional Paid-in Capital		Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Income		Total
Balance- April 1, 2012		42,370,000	$	4,237	$	84,727,616	$	108,179,075	$	(2,741,634	)	$	12,261,318	$	202,430,612
Fair value of vested options						~~336~~1,~~946~~010,838									~~336~~1,~~946~~010,838
Net income								216,~~071~~714,~~963~~644							216,~~071~~714,~~963~~644
Foreign currency translation adjustments													~~298~~531,~~763~~128		~~298~~531,~~763~~128
Balance- June 30, 2012 (Unaudited)		42,370,000	$	4,237	$	85,064,562	$	110,251,038	$	(2,741,634	)	$	12,560,081	$	205,138,284
Balance- December 31, 2012 (Unaudited)		42,370,000	$	4,237	$	85,738,454	$	124,893,719	$	(2,741,634	)	$	12,792,446	$	220,687,222

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

CHINA-BIOTICS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

(Amounts expressed in US Dollars)

	Three months ended June 30,
	Nine months ended December 31,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	216,~~071~~714,~~963~~644		$	(24,~~057~~809,~~030~~314	)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Amortization		2678,~~206~~665			929,~~577~~064
Depreciation		13,~~177~~663,~~403~~367			~~792~~2,~~323~~554,575
Provision of allowance for doubtful accounts		-582,973			~~404~~1,~~679~~228,064
Fair value of vested options		~~336~~1,~~946~~010,838			~~473~~1,~~851~~147,743
Change in operating assets and liabilities :
- Accounts receivable		2,~~836~~436,~~504~~558			202,~~931~~221,~~507~~843
- Inventories		(~~236~~830,~~697~~779	)		(12,~~605~~086,~~099~~945	)
- Deposits		~~(985~~752,~~319~~406	)		8688,~~207~~030
- Prepayments		~~(107~~90,~~363~~627	)		~~132~~(306,~~985~~960	)
- Other receivables		(342,~~351~~109,456	)		(6877,~~327~~260	)
- Accounts payable		(129,~~132,783~~257	)		(3856,~~705,276~~878	)
- Other payables and accruals		~~220~~595,~~994~~202			(1539,~~097,034~~792	)
- Taxes payable		(1,~~936~~496,~~093~~606	)		(2210,~~288,107~~380	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		2,237,410			12,010,256
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		21,459,182			(1,618,210	)
CASH FLOWS FROM INVESTING ACTIVITIES
Prepayments for equipment		(12,197,260	)		(1,066,451	)
Issuance of loan receivable		-			(20,622,788	)
Purchase of property, plant and equipment		(8,734,151	)		(57,896	)
Prepayments for long-term capital expenditures		(13,802,340	)		(1,092,357	)
NET CASH USED IN INVESTING ACTIVITIES		(20,931,411	)		(1,124,347	)
Purchase of property, plant and equipment		(13,540,379	)		(1,993,893	)
NET CASH USED IN INVESTING ACTIVITIES		(27,342,719	)		(23,709,038	)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of bank loan		(792,670	)		-
Proceeds of bank loans		20,197,201			-
Advance from director		111,228			4,445,433
Repayment of bank loan		(12,245,547	)		-
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES		(681,442	)		4,445,433
(Repayment to) advance from director		(4,290,633	)		4,509,554
Effect of exchange rate changes on cash and cash equivalents		(41,315	)		(1,571,418	)
NET CASH PROVIDED BY FINANCING ACTIVITIES		3,661,021			4,509,554
NET CHANGES IN CASH AND CASH EQUIVALENTS BALANCES		(19,416,758	)		13,759,924
Effect of exchange rate changes on cash and cash equivalents		586,664			(1,172,532	)
NET CHANGES IN CASH AND CASH EQUIVALENTS BALANCES		(1,635,852	)		(21,990,226	)
CASH AND CASH EQUIVALENTS BALANCES, beginning of period		70,086,074			143,988,348
CASH AND CASH EQUIVALENTS BALANCES, end of period	$	5068,~~669~~450,~~316~~222		$	~~157~~121,~~748~~998,~~272~~122
Supplemental disclosure of cash flow information:
Interest paid	$	~~145~~477,~~460~~101		$	-352
Income taxes paid	$	24,~~622~~356,~~353~~668		$	12,~~070~~601,~~874~~595
Non cash financing and investing activities:
Transfer of prepayments for equipment to property, plant and equipment	$	15,972,578		$	-
Transfer of long term deposit for patent to other receivable		4,452,927			-

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

CHINA-BIOTICS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIODS ENDED ~~JUNE~~DECEMBER 3031, 2012 AND 2011

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

China-Biotics, Inc. (sometimes referred to as “China-Biotics” or the “Company”) is engaged in the research, development, production, marketing, and distribution of probiotics products (which we sometimes refer to simply as “probiotics”), which are products that contain live microbial food supplements that beneficially affect the host by improving its intestinal microbial balance. The Company was incorporated under the name Otish Resources, Inc. in Delaware in February 2003.

2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES

Basis of presentation

The accompanying unaudited condensed consolidated financial statements as of and for the three- and nine months ended ~~June~~December 3031, 2012 and 2011 have been prepared based upon Securities and Exchange Commission rules that permit reduced disclosure for interim periods and include, in the opinion of management, all adjustments (consisting of normal recurring adjustments and reclassifications) necessary to present fairly the financial position, results of operations and cash flows as of ~~June~~December 3031, 2012 and for all periods presented. Information as of March 31, 2012 was derived from the audited consolidated financial statements of the Company for the year ended March 31, 2012.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Form 10-K filed on September 14, 2012 for the year ended March 31, 2012. The results of operations for the three and nine months ended ~~June~~ 30December 31, 2012 are not necessarily indicative of the operating results to be expected for the full year ending March 31, 2013.

The condensed consolidated financial statements and accompanying notes are presented in United States dollars and prepared in conformity with US GAAP which requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Basis of consolidation

The unaudited condensed consolidated financial statements for China-Biotics, Inc. and its subsidiaries are prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of Sinosmart Group Inc. (“SGI”), Shanghai Shining Biotechnology Co. Ltd. (“Shining”), Growing, State Limited (“GSL”), Growing Bioengineering (Shanghai) Co. Ltd. (“Growing”), King Treasure Group Limited (“KTG”), ~~BDH~~Best Design Holdings Limited (“BDH”), and Growing Bio (Yangling) Co. Ltd (“Growing Yangling”). Intercompany accounts and transactions have been eliminated in consolidation.

Fair value of financial instruments

Fair value measurements are determined using authoritative guidance issued by the Financial Accounting Standards Board (“FASB”), with the exception of the application of the guidance to non-recurring, non-financial assets and liabilities as permitted. Fair value is defined in the authoritative guidance as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy was established, which prioritizes the inputs used in measuring fair value into three broad levels as follows:

Level 1-Quoted prices in active markets for identical assets or liabilities.

Level 2-Inputs, other than the quoted prices in active markets, are observable either directly or indirectly.

Level 3-Unobservable inputs based on the Company’s assumptions

The Company is required to use observable market data if available without undue cost and effort. The following table presents certain investments and liabilities of the Company’s financial assets measured and recorded at fair value on the Company’s consolidated balance sheets on a recurring basis and their level within the fair value hierarchy as of June 30, 2012 and March 31, 2012:

	Fair Value Measurements as at June 30, 2012
	Balance at June 30, 2012		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Loan receivable	$	20,784,923	$	-	$	20,784,923	$	-

	Fair Value Measurements as at December 31, 2012
	Balance at December 31, 2012		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Loan receivable	$	20,810,652	$	-	$	20,810,652	$	-

	Fair Value Measurements as at March 31, 2012
	Balance at March 31, 2012		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Loan receivable	$	20,753,343	$	-	$	20,753,343	$	-

Recent Accounting Pronouncements

In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment”, an update to existing guidance on the assessment of goodwill impairment. This update simplifies the assessment of goodwill for impairment by allowing companies to consider qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before performing the two step impairment review process. It also amends the examples of events or circumstances that would be considered in a goodwill impairment evaluation. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company adopted ASU 2011-08 effective January 1, 2012. We do not believe that the adoption of this new accounting guidance will have a significant effect on our goodwill impairment assessments in the future.

In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” This ASU requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. ASU No. 2011-11 will be applied retrospectively and is effective for annual and interim reporting periods beginning on or after January 1, 2013. The Company does not expect adoption of this standard to have a material impact on its consolidated results of operations, financial condition, or liquidity.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the Securities and Exchange Commission (the “SEC”) did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.

3. INCOME (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted income (loss) per share:

	Three months ended June 30,
	Three months ended December 31,					Nine months ended December 31,
	2012 (Unaudited)		2011 (Unaudited)
	2012		2011			2012		2011
Income (loss) per share – Basic
Income (loss) per share – Basic and Diluted
Income (loss) for the period	$	28,~~071~~926,~~963~~584	$	(29,~~057~~108,~~030~~144	)	$	16,714,644	$	(4,809,314	)
Basic average common stock outstanding		22,150,200		22,150,200			22,150,200		22,150,200
Net income (loss) per share	$	0.0940	$	(0.0941	)	$	0.75	$	(0.22	)

	Three months ended June 30,
	2012		2011
Income (loss) per share – Diluted
Income (loss) for the period	$	2,071,963	$	(2,057,030	)
Basic average common stock outstanding		22,150,200		22,150,200
Diluted effect from vested stock options		176,363		-
Diluted average common stock outstanding		22,326,563		22,150,200
Net income (loss) per share	$	0.09	$	(0.09	)

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution, using the treasury stock method that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, or resulted in the issuance of common stock that then shared in the earnings (loss) of the Company. In computing diluted loss per share, the treasury stock method assumes that outstanding options and warrants are exercised and the proceeds are used to purchase common stock at the average market price during the period. Options and warrants may have a dilutive effect under the treasury stock method only when the average market price of the common stock during the period exceeds the exercise price of the options and warrants.

~~Basic~~For ~~income~~the ~~(loss)~~three and ~~per~~nine ~~share~~month isperiods ~~computed~~ended byDecember ~~dividing~~31, ~~the~~2012, ~~net~~there ~~income~~were by660,000 ~~the~~outstanding ~~weighted~~stock ~~average~~options ~~number~~and ofwarrants ~~outstanding~~exercisable ~~common~~at $14.81. Since ~~stock~~the ~~during~~exercise ~~the~~prices ~~period. The diluted~~of ~~income~~these ~~(loss)~~options ~~per~~and ~~share~~warrants are ~~calculation~~greater ~~includes~~than the ~~impact~~closing ofmarket ~~dilutive~~price ~~convertible~~and ~~securities,~~the ifaverage ~~applicable. The~~closing ~~weighted~~market ~~average~~prices ~~number~~during ofthe period, these ~~outstanding~~options ~~common~~and ~~stock~~warrants isare ~~determined~~deemed by“Out ~~relating~~of the ~~portion~~Money" of(exercise ~~time~~price is ~~within~~greater athan ~~reporting~~market ~~period~~price). As ~~that a~~such, ~~particular~~the ~~number~~effect of these shares ofin ~~common~~the ~~stock~~Company's ~~has~~EPS ~~been~~calculation ~~outstanding~~is toanti-dilutive ~~the~~and have ~~total~~been ~~time in that period~~excluded.

4. RISKS, UNCERTAINTIES, AND CONCENTRATIONS

Economic and political risks

The Company’s operations are conducted in the People’s Republic of China (“PRC”) and are subject to various political, economic, and other risks and uncertainties inherent in this country. Among other risks, the Company’s operations are subject to the risks of restrictions on transfer of funds; export duties, quotas and embargoes; domestic and international customs and tariffs; changing taxation policies; foreign exchange restrictions; and political conditions and governmental regulations.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. As of ~~June~~December 3031, 2012 and March 31, 2012, the Company had cash deposits of $5068.6745 million and $70.09 million, ~~placed~~respectively, placed with several banks in the PRC, which includes the Special Administrative Region of Hong Kong, where there is currently no rule or regulation in place for obligatory insurance of bank accounts. For the three and nine months ended ~~June~~December 3031, 2012 and 2011, all of the Company’s sales arose in the PRC. In addition, all accounts receivable as at ~~June~~December 3031, 2012 and March 31, 2012 are from customers in the PRC.

Concentration of Customers

~~The~~For ~~Company~~the ~~had~~three nomonths ~~sales~~ended toDecember a31, ~~single~~2012, there is one customer that accounted ~~for~~over ~~more~~5% ~~than~~of 10our sales revenue. For the nine months ended December 31, 2012, there is no customer that accounted over 5% of ~~total~~our ~~gross~~ sales revenue. For the three and nine months ended ~~June 30~~December 31, ~~2012 or~~ 2011, there was no customer that accounted ~~for~~ over 5% of our sales revenue. As of ~~June~~December 3031, 2012, there ~~was~~ is one customer that accounted for 6.5% of our accounts receivable. As of March 31, 2012, there was one customer that accounted for 4.8% of our accounts receivable.

5. ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following at:

	June 30, 2012 (Unaudited)			March 31, 2012
	December 31, 2012 (Unaudited)			March 31, 2012
Accounts receivable	$	32,~~274~~141,~~998~~217		$	35,057,662
Less: Allowance for doubtful accounts		(12,~~667~~254,~~721~~507	)		(1,665,188	)
	$	3029,~~607~~886,~~277~~710		$	33,392,474

6. INVENTORIES

Inventories consisted of the following at:

	June 30, 2012 (Unaudited)		March 31, 2012
	December 31, 2012 (Unaudited)		March 31, 2012
Raw materials	$	~~761~~743,~~216~~625	$	801,288
Work-in-progress		~~169~~72,~~066~~300		99,763
Finished goods		1,~~251~~961,~~879~~040		1,041,498
	$	2,~~182~~776,~~161~~965	$	1,942,549

7. LOAN RECEIVABLE

On December 19, 2011, the Company entered into an agreement with Jiangxi International Trust Co., Ltd. (“Jiangxi”) to loan $20,~~784~~810,~~923~~652 (RMB 131,100,000) to the Jiangxi International Trust of Yinhe #7 Property, an investment fund sponsored by Jiangxi. The loan principal is due on December 26, 2013, is unsecured, and according to the loan agreement, the Company is to earn 20% interest per annum, less a 5% investment management fee per annum. Interest income for the three months ended June 30, 2012 includes $1,039,427 of interest accrued on the outstanding balance. Such interest income after netting of the management fee was $776,683 for the three months ended June 30, 2012. Jiangxi is a major trust and investment company that is executing different investment projects in the PRC, including real estate projects, listed company ~~restructuring~~restructurings, and other financial services.

The loan principal is due on December 26, 2013, is unsecured, and according to the loan agreement, the Company is to earn 20% interest per annum, less a 5% investment management fee per annum. Interest income for the three and nine months ended December 31, 2012, net of management fees, was $776,233 and $2,325,218 for the three and nine months ended December 31, 2012, respectively. As of December 31, 2012, $2,081,065 of accrued interest income is included in Other Receivables on the accompanying December 31, 2012 balance sheet.

8. DEPOSITS

Deposits for the acquisition of long-term assets and operating trading deposits consisted of the following:

	June 30, 2012 (Unaudited)		March 31, 2012
	December 31, 2012 (Unaudited)		March 31, 2012
Long term
Deposit for acquisition of a company	$	23,~~775~~805,~~937~~367	$	23,739,812
Deposit for acquisition of patent		~~6,340,249~~-		6,330,616
		30,116,186		30,070,428
Deposit for acquisition of technical know-how and processes		1,904,429		-
		25,709,796		30,070,428
Short term
Other operating deposits		2366,~~101,210~~603		1,114,367
	$	3226,~~217~~076,~~396~~399	$	31,184,795

On March 27, 2012, the Company made a deposit of $23,~~775~~805,~~937~~367 (RMB 150,000,000) to the government of Yangling for a bid to acquire a probiotics company located in Yangling, Shaanxi Province that is in receivership. According to the relevant regulations, the deposit will be treated as part of the purchase price of the acquisition if the transaction is approved. As of ~~December~~February 2113, ~~2012~~2013, the government of Yangling is reviewing bids received for the probiotics company and expects to complete this process by the end of calendar ~~year 2012~~2013. If ~~the~~ the Company does not win the auction to acquire the probiotics company, its deposit will be returned. As of February 6, 2013, the Company and the government of Yangling verbally agreed that if the government of Yangling does not commence the acquisition procedure before the end of March 2013, the Company will withdraw its bid and the deposit will be wholly returned to the Company.

On February 1, 2012, our subsidiary, Growing, entered into an agreement to acquire a patent regarding a production technology, including the related technical know-how and processes, for $6,657,262 (RMB 42,000,000) from an unrelated PRC company. Growing made a deposit of $6,~~340~~330,~~249~~116 (RMB 40,000,000) to the seller for the transfer of the patent ~~within~~ which was initially expected to be within 210 days, or by August 30, 2012. The original terms of the agreement were that if the patent cannot be transferred to Growing within 210 days, Growing will be refunded the deposit paid and also be compensated an additional $159,000 (RMB 1,000,000) for damages. The transfer was not completed by August 30, 2012, and on September 3, 2012, Growing and the seller mutually agreed to to extend the completion date to December 30, 2012. As of December 2124, 2012, because of the unknown timing for the approval of the transfer ~~had~~from ~~not~~the ~~yet~~State ~~been~~Intellectual ~~completed~~Property ~~because~~Office of the PRC, Growing and the seller mutually agreed and entered ~~Company~~into isa ~~waiting~~supplementary ~~for~~agreement ~~approval~~to ofterminate the transfer ~~from~~of the ~~State~~patent ~~Intellectual~~and ~~Property~~the ~~Office~~seller agreed to return $4,443,669 (RMB 28,000,000) of the ~~PRC.~~deposit ~~The~~to the Company. ~~has~~Simultaneously nowith ~~information~~the termination of the acquisition of the patent, according to the supplementary agreement, the seller agreed to ~~allow~~transfer itto the Company the technical know-how and processes related to ~~estimate~~the patent ~~when~~for ~~such~~$1,904,429 ~~confirmation~~(RMB ~~will~~12,000,000) be(paid ~~obtained~~by the seller retaining this amount of the original deposit) within 60 days, ~~but~~or by ~~expects~~February 22, 2013. The amount of the ~~transaction~~deposit to ~~close~~be inretained ~~2013~~by the seller of $1,904,429 ~~after~~will ~~which~~be capitalized by the Company ~~patent~~when the technical know-how and processes are transferred and is ~~planned~~included toin beDeposits ~~used~~– long term in the ~~Company’s~~accompanying balance ~~operations~~sheet as of December 31, 2012.

AsThe balance of ~~June~~the deposit 30of $4,443,669 ~~2012 and~~(RMB 28,000,000) due the Company will be refunded before March 31, ~~2012~~2013, and is included in Other Current Receivables on the ~~Company~~accompanying ~~currently~~December ~~has~~31, ~~outstanding~~2012 ~~deposits~~balance ~~and~~sheet. ~~prepayments~~Payments ofdue ~~$34~~under the agreement are as (i) RMB11,~~234~~200,~~650~~000 ~~and~~on or ~~$22~~before Jan 31,~~007~~ 2013,~~427~~ ~~relation~~(subsequently ~~to delivery~~collected ofby ~~equipment~~the toCompany), be(ii) ~~used~~RMB8,400,000 aton ~~these~~or ~~facilities~~before Feb 20, 2013, and (iii) RMB8,400,000 on or before Mar 31, 2013.

9. LAND USE RIGHTS

The land use rights consisted of the following:

	June 30, 2012 (Unaudited)			March 31, 2012
	December 31, 2012 (Unaudited)			March 31, 2012
Land use rights	$	5,~~241~~247,~~315~~803		$	5,231,956
Less: Accumulated amortization		(~~201~~254,~~541~~273	)		(175,072	)
	$	54,~~039~~993,~~774~~530		$	5,056,884

On March 21, 2006, GSL, our subsidiary, entered into an agreement, as amended, with Shanghai Qingpu Industrial Park District Development (Group) Company Limited for the lease of 36,075 square meters of land in the Shanghai Qingpu Industrial Park District on, which we constructed our 300-metric ton capacity production plant, for a term of 50 years beginning January 15, 2008. The agreement provides for the payment of leasing fees of approximately $1.8 million. In February 2009, the formal land use right certificate was issued. There are no future lease payments under this land lease. The Qingpu land use right was pledged to a bank as a credit guarantee for a loan of $4,~~755~~747,~~187~~587 (RMB 30,000,000 ~~million~~, see Note 12) during the period ended December 31, 2012. As such loans were repaid during November 2012, the Qingpu land use right was released accordingly. At ~~June~~December 3031, 2012, the net book value of such land use right was $1,~~799~~781,~~085~~554.

12In 2012, our Growing Yangling, subsidiary of the Company that operates in Yangling, the PRC, has acquired a land use right for a period of 50 years for $3,272,528, beginning January 18, 2012. At December 31, 2012, the net book value of the land use right was $3,211,976.

InAmortization ~~2012,~~expense amounted ~~our~~to ~~Growing Yangling~~$26,294 ~~subsidiary~~and of$9,780 for the ~~Company~~three ~~that~~months ~~operates~~ended inDecember ~~Yangling~~31, ~~the PRC~~2012, ~~has~~and ~~acquired~~2011, arespectively. ~~land~~Amortization ~~use~~expense ~~right for a period of 50 years,~~amounted ~~beginning~~to ~~January 18~~$78,665 ~~2012.~~and ~~At June 30~~$29,064 ~~2012,~~for the ~~net~~nine ~~book~~months ~~value~~ended ofDecember ~~the~~31, ~~land~~2012, ~~use~~and ~~right was $3~~2011,~~219,191~~ respectively.

Amortization expense amounted to $26,206 and $9,577 for the three months ended June 30, 2012, and 2011, respectively.

The estimated amortization expense for the land use rights over each of the five years and thereafter is summarized as below:

	June 30, 2012
	December 31, 2012
For the year ended March 31:
2013	$	7826,~~606~~239
2014		104,~~808~~956
2015		104,~~808~~956
2016		104,~~808~~956
2017		104,~~808~~956
Thereafter		4,~~541~~547,~~936~~467
	$	54,~~039~~993,~~774~~530

10. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, net, consisted of the following:

	June 30, 2012 (Unaudited)			March 31, 2012
	December 31, 2012 (Unaudited)			March 31, 2012
Building	$	4862,~~028~~249,~~306~~835		$	44,754,344
Plant and machinery		2426,~~033~~758,~~623~~438			23,963,145
Leasehold improvements		12,~~817~~106,~~544~~296			1,814,783
Office equipment		46,~~233~~281,~~772~~089			4,220,654
Motor vehicles		~~819~~820,~~663~~677			543,569
Construction in progress		1820,~~571~~085,~~692~~100			13,217,574
		97,504,600			88,514,069
		118,301,435			88,514,069
Less: Accumulated depreciation		(1720,~~621~~127,~~026~~241	)		(16,433,738	)
	$	7998,~~883~~174,~~574~~194		$	72,080,331

For the three months ended June 30, 2012 and 2011, depreciation expense amounted to $1,177,403 and $792,323, respectively.

The Company is currently in Phase 2 construction of a research and development center and other ancillary facilities in Qingpu. At June 30, 2012 and March 31, 2012, construction in progress included $18,037,380 and $12,978,116 related to the construction of this facility.

At June 30, 2012, the corporate headquarters office building was pledged to banks as a guarantee for a total of loans of $3,170,125 (RMB 20,000,000, see Note 12 and 18). The net book value of the building was $8,820,611.

The cost for constructing the Yangling facility is expected to be over $58 million invested over two years, which would be mainly facilitated by the capital injection from BDH. The facility will produce probiotics and probiotics-related biological additives for the animal feed industry. Currently, the facility is in its construction stage. During the year ended March 31, 2011, the Company made total payment of approximately $3.25 million (RMB 20,608,112) to acquire the land use right of approximately 122,600 square meters (183.94 mu). We received the land certificate on January 28, 2012 and commenced construction in June 2012. We expect to complete construction by June 2014. As of June 30, 2012 and March 31, 2012, construction in progress included $534,312 and $239,458 related to the construction of this facility. As of June 30, 2012, Growing Yangling entered into agreements with contractors related to the construction of the plant, manufacturing facilities and purchase of production equipment for future payment of $2,552,627 and $21,965,081, respectively.

Prepayments for equipment and construction includes advance deposits of $14,711,254 and $14,688,902 related to construction that had not yet commenced as of June 30, 2012 and March 31, 2012, respectively. Also included in prepayments for equipment and construction as of June 30, 2012 and March 31, 2012, are outstanding deposits and prepayments of $19,523,396 and $7,318,525 related to the delivery of equipment to be used at these facilities.

For the three months ended December 31, 2012 and 2011, depreciation expense amounted to $1,295,597 and $1,007,784, respectively. For the nine months ended December 31, 2012 and 2011, depreciation expense amounted to $3,663,367 and $2,554,575, respectively.

At December 31, 2012, the corporate headquarters office building and factory buildings in Qingpu were pledged to banks as security for loans totaling $15,870,245 (RMB 100,000,000, see Note 12). At December 31, 2012, the net book value of the corporate headquarters office building and factory buildings in Qingpu was $57,941,220.

As of December 31, 2012, the Company has the following construction projects in process:

The Company is currently in Phase 2 construction of a research and development center and other ancillary facilities in Qingpu. At December 31, 2012 and March 31, 2012, construction in progress included $4,324,195 and $12,978,116 related to the construction of this facility.

The Company is in construction of a facility in Yangling that is expected to involve investment of over $58 million over two years. The facility will produce probiotics and probiotics-related biological additives for the animal feed industry. During the year ended March 31, 2011, the Company made total payment of approximately $3.25 million (RMB 20,608,112) to acquire the land use right of approximately 122,600 square meters (183.94 mu) (see Note 9). We received the land certificate on January 28, 2012 and commenced construction in June 2012. We expect to complete construction by June 2014. As of December 31, 2012 and March 31, 2012, construction in progress included $15,760,905 and $239,458 related to the construction of this facility. As of December 31, 2012, Growing Yangling entered into agreements with contractors related to the construction of the plant, manufacturing facilities and purchase of production equipment for future payment of $20,908,175 and $12,245,481, respectively.

As of December 31, 2012 and March 31, 2012, the Company currently had outstanding deposits and prepayments of $19,895,653 and $22,007,427 relating to delivery of equipment to be used at these facilities.

11. AMOUNT DUE TO DIRECTOR

As of ~~June 30, 2012 and~~ March 31, 2012, the ~~amount~~amounts due to a director, Mr. Song Jinan, of $4,954,345 represented advances to the Company which are unsecured, interest-free and repayable on demand. The advances from such director were entered into because of the difficulty the Company faced in paying expenses incurred outside China in non-PRC currency due to the difficulties the Company had in converting currency because of foreign exchange controls. During the nine months ended December 31, 2012, the director advanced an additional $495,000. In December 2012, $4,785,633 of these advances was repaid and the amount due the director as of December 31, 2012 was $574,450.

12. LOANS PAYABLE

Short term loan

On March 19, 2012, the Company received a loan from the Bank of China for $3,165,~~308~~058 (RMB 20,000,000), secured by the corporate headquarters office building of Growing (see Note10), due September 19, 2012. On September 19, 2012 the loan was exchanged for a new loan that was due September 19, 2013. Interest iswas at 7.208% per annum, based on 118% of the ~~six~~twelve months’ of RMB borrowing prime rate established by the People’s Bank of China at the time of funding., ~~Total principal~~ and ~~interest were~~is due ~~September~~at ~~19,~~the ~~2012~~end of each calendar quarter. On ~~September~~ December 19, 2012, the loan for $3,165,~~308~~058 (RMB 20,000,000) was fully repaid.

On August 29, 2012, the Company received a loan from Shanghai Rural Commercial Bank for $791,264 (RMB 5,000,000), secured by the land use right in Qingpu of Growing (see Note 9), due August 28, 2013. Interest was 6.90% per annum, based on 118% of the one year’s of RMB borrowing prime rate established by the People’s Bank of China at the time of funding, and is due at the end of each calendar quarter. The purpose of this loan was for purchase of raw materials. On November 30, 2012, the loan was repaid before due date. Due to the early repayment of this loan and certain other loans with Shanghai Rural Commercial Bank discussed under Long term loan notes below, the Company incurred a penalty for early repayment of $79,517 (RMB 500,000) (the “Single Penalty”).

On September 24, 2012, the Company obtained a bank loan facility from Bank of Jiangsu for $15,870,245 (RMB 100,000,000), secured by the assets of Growing, including the corporate headquarters office building and factory buildings in Qingpu of Growing (see Note10) (“Bank Loan Facility”). The loan consisted of the following advances:

On October 31, 2012, the Company borrowed $7,935,122 (RMB 50,000,000), under the Bank Loan Facility, with the loan due October 30, 2013. Interest is 6.60% per annum, based on 110% of the one year’s of RMB borrowing prime rate established by the People’s Bank of China at the time of funding, and is due at the end of each calendar quarter. The interest rate will be reset on the first day of each calendar year. As of February 6, 2013, there was no notice for change of the interest rate. The purpose of this loan was for purchase of raw materials.

On December 28, 2012, the Company borrowed $2,380,537 (RMB 15,000,000), under the Bank Loan Facility, with the loan due December 27, 2013. Interest is 6.60% per annum, based on 110% of the one year’s of RMB borrowing prime rate established by the People’s Bank of China at the time of funding, and is due at the end of each calendar quarter. The purpose of this loan was for purchase of raw materials.

On December 31, 2012, the Company borrowed $5,554,586 (RMB 35,000,000), under the Bank Loan Facility, with the loan due December 30, 2013. Interest is 6.60% per annum, based on 110% of the one year’s of RMB borrowing prime rate established by the People’s Bank of China at the time of funding, and is due at the end of each calendar quarter. The purpose of this loan was for purchase of raw materials.

Long term loan

On December 7, 2011, the Company received a loan from Shanghai Rural Commercial Bank for $4,747,963 (RMB 30,000,000), secured by the land use right in Qingpu ofheld by Growing (see Note 9), due May 27, 2014. Interest iswas at 7.65% per annum, based on 115% of the 1-to-3 years’ RMB borrowing prime rate set by the People’s Bank of China at the time of funding, and iswas due at the end of each calendar quarter. On ~~May~~The 25balance outstanding as of March 31, 2012 was $4,747,963. During the ~~Company~~nine ~~repaid~~months ~~$792,531~~ended December ~~(RMB 5~~31,~~000,000)~~ of2012 the loan ~~and~~was ~~the~~fully ~~balance~~repaid. ~~outstanding~~Due asto ofthe ~~June~~early 30repayment, ~~2012~~the ~~was~~Company ~~$3,962,656~~incurred the Single Penalty to Shanghai ~~(RMB~~Rural ~~25,000,000)~~Commercial Bank which is discussed in the description of Short term loan notes above.

During September 2012, the Company received loans from Shanghai Rural Commercial Bank totaling $316,506 (RMB 2,000,000), secured by the land use right in Qingpu held by Growing (see Note 9), due December 2014. Interest was 7.36% per annum, based on 118% of one year’s of RMB borrowing prime rate established by the People’s Bank of China at the time of funding, and was due at the end of each calendar quarter. The purpose of this loan was for financing the costs of a renovation project. On November 30, 2012, the loans were repaid. Due to the early repayment, the Company incurred the Single Penalty to Shanghai Rural Commercial Bank which is discussed in the description of Short term loan notes above.

13. INCOME TAXES

For the ~~three~~nine months ended ~~June~~December 3031, 2012 and 2011, the components of income (loss) before income taxes were:

	Three months ended June 30,
	Nine months ended December 31,
	2012 (Unaudited)			2011 (Unaudited)
Income before income taxes generated in the PRC	$	3,980,519		$	(1,096,848	)
Income (loss) before income taxes generated in the PRC	$	22,662,054		$	(1,428,790	)
(Loss) income before income taxes generated in the United States of America		(740,526	)		(819,019	)
Loss before income taxes generated in the United States of America		(2,221,731	)		(2,182,029	)
Loss before income taxes generated in the British Virgin Islands		(99297,~~057~~857	)		(99298,~~279~~684	)
Loss before income taxes generated in Hong Kong		(2,079	)		24(636	)
	$	320,140,~~935~~387		$	(23,~~015~~910,~~122~~139	)

For the three ~~months~~and nine months ended ~~June~~December 3031, 2012 and 2011, there was no tax provision related to income (loss) generated in the United States of America, the British Virgin Islands, and Hong Kong. For the ~~three~~nine months ended ~~June~~December 3031, 2012 and 2011, the provision for income taxes relating to income generated in the PRC consists of the following:

	Three months ended June 30,
	Nine months ended December 31,
	2012 (Unaudited)		2011 (Unaudited)
Current-PRC	$	13,~~068~~425,~~972~~743	$	41899,~~908~~175
Deferred-PRC		-		-
	$	13,~~068~~425,~~972~~743	$	41899,~~908~~175

For the three months ended June 30, 2012 and 2011, the reconciliation between the PRC statutory tax rate and effective tax rate are as follows:

	Three months ended June 30,
	2012 (Unaudited)			2011 (Unaudited)
Statutory rate		25.0	%		25.0	%
Preferential tax rate		(22.5	)%		(3.0	)%
Effect of different tax rates in other jurisdictions		4.6	%		(7.9	)%
Expenses not deductible for tax purpose		-	%		(5.0	)%
Effect of taxable temporary difference		19.7	%		10.3	%
Under provision of income tax in prior year		4.2	%		-	%
Tax losses not recognized		3.0	%		(22.6	)%
Effective tax rate		34.0	%		(3.2	)%

As of June 30, 2012 and March 31, 2012, the Company had incurred tax losses of approximately $1.0 million and $4.2 million, respectively which can be carried forward in various jurisdictions from five to 25 years.

	June 30, 2012 (Unaudited)			March 31, 2012
Deferred tax assets
Net operating loss carryforwards
- PRC	$	30,556		$	320,292
- United States of America		64,426			334,633
- Hong Kong		-			132
Less: Valuation allowance		(94,982	)		(655,057	)
Net deferred tax assets	$	-		$	-

The Company is incorporated in Delaware and is subject to U.S. tax law. The daily operations of the Company in the United States principally relate to payment of legal and professional fees. The income generated from the United States in 2011 primarily related to the change in the fair value of derivative liability, which is a permanent difference between book and tax reporting. The Company has no taxable income in the United States and does not expect it will be able to realize the U.S. tax losses.

There is no income tax for companies not carrying out business activities in the British Virgin Islands or Hong Kong. Accordingly, the Company's financial statements do not present any income tax provisions related to the British Virgin Islands or Hong Kong tax jurisdictions.

The Company has its principal operations in the PRC and is subject to a PRC Enterprise Income Tax (“EIT”) rate of 25% in calendar years 2012 and 2011, subject to certain rate reductions. The Company’s subsidiary Shining is located in the Shanghai Jinqiao special economic zone and was awarded the status of “high technology” enterprise for the calendar year 2007 until 2011. Therefore, Shining enjoyed a preferential income tax rate of 15% in 2007 to 2011. Beginning January 1, 2012, Shining’s EIT rate is 25%.

The Company’s subsidiary Growing is located in Qingpu and has similar business operations as Shining, but with a larger production scale. Growing was exempted from PRC Enterprise Income Tax in calendar 2008 and 2009, followed by 50% tax exemption for calendar 2010 to 2012.

The Company’s subsidiary, Growing Yangling, is located in Yangling and as of March 31, 2012, its manufacturing plant was under construction. According to the investment agreement with the local government, Growing Yangling is entitled to have a tax incentive that exempts local portion of EIT for three calendar years from the commencement of production, followed by 50% tax exemption of local portion for the next year. There is no financial effect from the tax holiday as Growing Yangling did not generate any assessable profit for the three months ended June 30, 2012 or 2011.

At June 30, 2012 and March 31, 2012, taxes payable consisted of the following:

	June 30, 2012 (Unaudited)		March 31, 2012
Taxes arising prior to 2005:
Value added tax and other taxes	$	5,716,431	$	5,707,746
Income taxes		3,117,177		3,112,441
Dividends withholding tax		4,720,137		3,914,453
		13,553,745		12,734,640
Total:
Value added tax and other taxes		239,316		1,366,106
Income taxes		314,015		2,100,059
Accrued interest on taxes		17,372,548		17,163,806
	$	31,479,624	$	33,364,611

For the nine months ended December 31, 2012 and 2011, the reconciliation between the PRC statutory tax rate and effective tax rate are as follows:

	Nine months ended December 31,
	2012 (Unaudited)			2011 (Unaudited)
Statutory rate		25.0	%		25.0	%
Preferential tax rate		(10.0	)%		3.7	%
Effect of different tax rates in other jurisdictions		2.2	%		(11.0	)%
Effect of taxable temporary difference		(2.3	)%		(27.4	)%
Under provision of income tax in prior year		0.6	%		-	%
Tax losses not recognized		1.5	%		(13.3	)%
Effective tax rate		17.0	%		(23.0	)%

As of December 31, 2012 and March 31, 2012, the Company had incurred tax losses of approximately $6.2 million and $4.2 million, respectively which can be carried forward in various jurisdictions from five to 25 years. The resulting deferred tax assets have been fully offset by a valuation allowance.

The Company has its principal operations in the PRC and is subject to a PRC Enterprise Income Tax (“EIT”) rate of 25% in calendar years 2012 and 2011, subject to certain rate reductions. The Company’s subsidiary Shining is located in the Shanghai Jinqiao Special Economic Zone and was awarded the status of “high technology” enterprise for the calendar years 2007 until 2011. Therefore, Shining enjoyed a preferential income tax rate of 15% in 2007 to 2011. Beginning January 1, 2012, Shining’s EIT rate is 25%.

The Company’s subsidiary Growing is located in Shanghai Qingpu Industrial Park and has similar business operations as Shining, but with a larger production scale. Growing was exempted from PRC Enterprise Income Tax in calendar years 2008 and 2009, followed by 50% tax exemption for calendar years 2010 to 2012.

The Company’s subsidiary, Growing Yangling, is located in Yangling and, as of December 31, 2012, its manufacturing plant was under construction. According to the investment agreement with the local government, Growing Yangling is entitled to have a tax incentive that exempts the local portion of EIT for three calendar years from the commencement of production, followed by 50% tax exemption of local portion for the next year. There is no financial effect from the tax holiday as Growing Yangling did not generate any assessable income for the three and nine months ended December 31, 2012 or 2011.

At December 31, 2012 and March 31, 2012, taxes payable consisted of the following:

	December 31, 2012 (Unaudited)		March 31, 2012

Taxes arising prior to 2005:
Value added tax and other taxes	$	5,723,508	$	5,707,746
Income taxes		3,121,036		3,112,441
Dividends withholding tax		3,925,262		3,914,453
Total taxes prior to 2005		12,769,806		12,734,640

Value added tax and other taxes		1,160,772		1,366,106
Income taxes		855,409		2,100,059
Accrued interest on taxes		17,177,263		17,163,806
	$	31,963,250	$	33,364,611

In addition to the EIT, companies in the PRC that are engaged in the sale of goods are generally required to pay value added taxes (“VAT”) at a rate of 17% of the gross sales proceeds received, less any deductible VAT already paid or borne by the taxpayer.

Our management believes that our operations in China were exempted from EIT and VAT for all years prior to 2005 because we had been recognized by the local government as an advanced technology enterprise. However, the Company never received a written confirmation from the appropriate tax authorities for the tax exemption status of our operations in China prior to 2005. As a result, there is no way to ascertain the ultimate position which may be taken by the relevant PRC tax authorities in the future and accordingly, full provisions for tax liabilities in the amount of $12,~~734~~769,~~640~~806, for all years prior to 2005 have been recorded by the Company. Beginning in January 2006, we made tax payments to the PRC tax authorities for 2005 and we have made regular tax payments to the PRC tax authorities for all subsequent periods.

In addition, in connection with dividends paid to the Shining shareholders between April 2003 to June 2005, Shining did not deduct a withholding tax at the rate of 20% as required by applicable Chinese laws and regulations. The Company has accrued the dividend withholding tax and interest on the dividend withholding tax.

According to PRC tax regulations, the overdue tax liabilities in the PRC for the calendar years prior to 2005 may be subject to interest at the 0.05% per day, and potential penalties for the late payment of taxes which is calculated on the basis of 0.5 times to five times the amount of taxes payable. Through March 31, 2011, the Company accrued the interest that may be potentially payable upon these taxes incurred prior to 2005 and the unpaid dividend withholding tax. Interest related to the unpaid taxes was recognized in the Company’s consolidated statements of operations as a component of its income tax provision.

For the ~~three~~nine months ended ~~June~~December 3031, 2012, management made an assessment of whether it was necessary to provide a further provision for interest and penalties on these unpaid amounts. Management determined that no further provision for interest and penalties was necessary given the unlikelihood of payment of the amount already accrued and provided in the financial statements. This assessment was based upon receipt by the company of a report by an independent tax expert that the amount of taxes prior to 2005 may not be payable, the length of time the amount has been outstanding, and that there have been no requests from PRC tax authorities for payment of the unpaid taxes outstanding amounts. As such, management believes that the previously recorded amounts are sufficient to cover any settlement of this liability.

The Company’s PRC subsidiaries are deemed “high technology” enterprises subject to preferred tax rates (tax holiday). The table below shows the effect of using the higher rates and earnings per share.

	Three months ended June 30,
	Nine months ended December 31,
	2012 (Unaudited)		2011 (Unaudited)
Income (loss) per common share-basic	$	0.0975	$	(0.0722	)
Effect of tax holiday		0.01		0.01
Pro forma income (loss) per common share-basic	$	0.1076	$	(0.0621	)

14. OPTION INCENTIVE PLAN

On January 16, 2011, the Board adopted the 2010 Equity Incentive Plan (the “2010 Plan”) and reserved 1,500,000 shares of common stock for issuance under the 2010 Plan. On March 9, 2011, the 2010 Plan was approved by the Company’s stockholders at the 2010 Annual Meeting of Stockholders.

On January 16, 2011, the Company granted to the directors and officers an option to purchase 910,000 shares of common stock under the 2010 Plan. The options have exercise price of $14.81 per share, an expiration date of five to ten years from the date of grant, and vest over 48 consecutive months: 20% in the first 12-month period; 20% in the second 12-month period; 30% in the third 12-month period; and 30% in the forth 12-month period. The Company determined the fair value of the options on the date of grant was $9,477,024 using the Black-Scholes-Merton option pricing model with the following assumptions: expected volatility, 76%; risk-free interest rate, 1.95%; expected weighted average life, five to ten years; and expected dividend yield, 0%. ~~As of June 30, 2012 and March 31, 2012, the total vested options were 198,000 shares and 165,000 shares, respectively.~~

During June 2011, two ~~candidates~~option holders resigned from their ~~position~~positions and terminated their services to the Company. They also did not exercise their vesting options within three months from the date of their termination. According to the option agreement, their options were forfeited and cancelled; the total number of forfeited and cancelled options was 250,000.

1617

~~During~~At ~~the~~December ~~three months ended June 30~~31, 2012 and ~~2011~~March 31, no2012, outstanding ~~vested~~ options were ~~exercised.~~as follows:

At June 30, 2012 and March 31, 2012, outstanding options were as follows:

	Number of Shares under Options			Weighted Average Exercise Price

Options outstanding at April 1, 2011		910,000		$	14.81
Options granted		-			-
Options expired or forfeited		(250,000	)		14.81
Options exercised		-			-
Options outstanding at March 31, 2012		660,000			14.81
Options granted		-			-
Options expired or forfeited		-			-
Options exercised		-			-
Options outstanding at December 31, 2012		660,000		$	14.81

	Number of Shares under Options			Weighted Average Exercise Price
Options outstanding at April 1, 2011		910,000		$	14.81
Options granted		-			-
Options expired or forfeited		(250,000	)		14.81
Options exercised		-			-
Options outstanding at March 31, 2012		660,000			14.81
Options granted		-			-
Options expired or forfeited		-			-
Options exercised		-			-
Options outstanding at June 30, 2012		660,000		$	14.81

As of December 31, 2012 and March 31, 2012, the total vested options were 264,000 shares and 165,000 shares, respectively.

The following table summarizes information about options outstanding at ~~June~~December 3031, 2012:

		Options Outstanding						Options Exercisable
Exercise price		Number of shares under Option		Weighted average remaining contractual life (years)		Weighted Average Exercise Price		Number of shares under Option		Weighted Average Exercise Price
$	14.81		660,000		76.50	$	14.81		~~198~~264,000	$	14.81

At ~~June~~December 3031, 2012 and March 31, 2012, ~~the~~ the options outstanding and exercisable had no intrinsic value.

For the three months ended ~~June~~December 3031, 2012 and 2011, the Company has recorded $336,946 and $~~473~~336,~~851~~946, respectively, as the fair value of the vested options. For the nine months ended December 31, 2012 and 2011, the Company has recorded $1,010,838 and $1,147,743, respectively, as the fair value of the vested options.

As of ~~June~~December 3031, 2012, total compensation cost related to non-vested stock options and restricted stock not yet recognized was approximately $4,~~717~~043,~~247~~354, which is expected to be recognized over the next 3024 months

15. PRODUCT RETURN CONCESSIONS

For the three ~~months~~and ~~ended~~nine ~~June 30, 2011 and six~~ months ended ~~September~~December 3031, 2011, product returns of $474,505 were deducted from sales due to a batch of probiotics products produced in June 2011 that were below the Company’s quality standards due to production problems.

As a result of a product returns after certain of our products did not meet our quality standards, and in order to improve the confidence of the Company’s distributors and end-user customers in our probiotics products, we provided special concession credits to our distributors during August 2011 to address the complaints and concerns of customers worried about food and healthcare products in the PRC. Such credits were made available for our distributors to reimburse end-user customers for products which were recalled. We treated these special credits as being comparable to a warranty on our probiotics products, and we incurred a cost of $7,143,914 for these credits for the three months ended September 30, 2011 that has been reflected as an additional cost of product returns in the accompanying consolidated financial statements. No additional such credits were made available for the three and nine months ended ~~June 30~~December 31, 2012. During the three and nine months ended ~~September~~December 3031, 2012, the Company recovered special concession credits amounting to $~~993~~1,~~671~~947,075 (~~RMB6~~RMB12,~~280~~243,~~000~~208) and $2,940,746 (RMB18,523,208), respectively, and included such amounts asin sales for the three and nine months ended ~~September~~December 3031, 2012.

16. COMMITMENTS AND CONTINGENCIES

Capital commitments

On August 12, 2010, BDH, a subsidiary of the Company, entered into ~~the~~ agreements with a government agency to establish manufacturing facilities for ~~animal~~ animal probiotics products in the Yangling Agricultural High-tech Industries Demonstration Zone in Shaanxi Province of China. In furtherance of such agreements, BDH incorporated a foreign, wholly owned subsidiary, Growing Yangling, with a registered capital of $50 million. As of ~~March~~December 31, 2012, the Company had injected into Growing Yangling $7.5 million as registered capital. According to the approval from the government agency dated October 12, 2010, the remaining balance of Growing Yangling’s registered capital of $42.5 million must be injected before July 13, 2013.

Shining also entered into agreements with contractors for initial work on the project in the amount of $125,917, which had not been paid as of June 30, 2012.

On February 1, 2012, our subsidiary, Growing, entered into an agreement to acquire a patent regarding a production technology for $6,657,262 (RMB 42,000,000) from an unrelated PRC company. Growing made a deposit of $6,340,249 (RMB 40,000,000) to the seller for the transfer of the patent within 210 days, or by August 30, 2012. The original terms of the agreement were that if the patent cannot be transferred to Growing within 210 days, Growing will be refunded the deposit paid and also be compensated an additional $159,000 (RMB 1,000,000) for damages. The transfer was not completed by August 30, 2012, and on September 3, 2012, Growing and the seller mutually agreed to extend the completion date to December 30, 2012. As of December 21, 2012, the transfer had not yet been completed because the Company is waiting for approval of the transfer from the State Intellectual Property Office of the PRC. The Company has no information to allow it to estimate when such confirmation will be obtained, but expects the transaction to close in 2013, after which the patent is planned to be used in the Company’s operations. Subject to the completion of the transfer of the patent, the Company will have to pay the balance, the future payment of which amounts to $317,012 (RMB2,000,000), which amount was contracted but not provided for as of June 30, 2012.

Purchase obligations

The Company entered into the agreements with ~~the~~its suppliers to purchase raw materials and packing materials. The amount of future payments is $169,~~140~~201,~~442~~614.

Other obligations

The Company entered into an agreement with a university to perform research and development. The amount of future payments is $1,~~424~~428,~~389~~322 (RMB 9,000,000).

Pending litigation

The Company and certain of its current and former officers and directors have been named as defendants in three putative shareholder class action lawsuits, one in the United States District Court for the Central District of California (Mohapatra v. China-Biotics, Inc., et al., No. 10-cv-6954 (C.D. Cal.), the “Mohapatra case”), and two in the United States District Court for the Southern District of New York (Hill v. China-Biotics, Inc., et al., No. 10-cv-7838 (S.D.N.Y.), the “Hill case”, and Casper v. Jinan, et al, No. 12-cv-4202 (S.D.N.Y), the “Casper case”). After certain shareholders filed motions for appointment as lead plaintiff, the plaintiff in the Mohapatra case voluntarily dismissed its case and the plaintiff in the Hill case, together with another shareholder, were appointed as lead plaintiffs. The lead plaintiffs filed an amended complaint in which they allege that the defendants violated Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making material misstatements or failing to disclose certain material information regarding, among other things, the Company’s financial condition, operations, and future business prospects, and the quality, nature, and quantity of the Company’s retail outlets. The lead plaintiffs seek to represent a class of shareholders who bought the Company’s securities between July 10, 2008 and August 27, 2010.

On August 18, 2011, the Company filed a motion to dismiss the lead plaintiffs’ amended complaint. The court dismissed the lead plaintiffs’ Section 11 claim, but gave them leave to replead. The court did not rule on the motion to dismiss the Section 10(b) claim. On January 9, 2012, the lead plaintiffs filed a second amended complaint that included a new named plaintiff and new allegations for the Section 11 claim. On February 27, 2012, the Company filed a motion to dismiss the amended Section 11 claim. Both that motion and the original motion to dismiss the Section 10(b) and Section 20(a) claims are currently pending before the court. The Company intends to defend this action vigorously.

In the Casper case, the plaintiff alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making material misstatements and seeks to represent a class of stockholders who bought the Company’s securities between February 9, 2011 and July 1, 2011. On October 18, 2012, the Hill case and the Casper case were consolidated, but no consolidated amended complaint has yet been filed. The Company intends to defend this action vigorously.

The Company and its directors have been named as defendants in a derivative lawsuit filed in the United States District Court for the District of Columbia (Marteney v. Song Jinan, et al., No. 10-cv-1983 (D.D.C.)). The complaint alleges that the directors breached their fiduciary duties by disseminating false and misleading financial statements and seeks unspecified damages. On March 26, 2012, the plaintiff filed an amended complaint in which he added Roth Capital Partners LLC and Maxim Group LLC (the “Underwriters”) as defendants. On September 7, 2012, the Underwriters filed a motion to dismiss. On October 23, 2012, the court approved a stipulation in which the plaintiff voluntarily dismissed the claim against the Underwriters. ~~On November 13, 2012, the clerk entered a default against the director defendants. On December 7, 2012, the parties submitted a stipulation lifting the clerk’s entry of default.~~ The defendants intend to defend this action vigorously.

With respect to the above-referenced litigation matters, the Company is unable at this time to estimate possible losses, if any, or any other impact of the outcome of the litigation matters on the consolidated financial statements.

Review of decision ordering that the registration of the Company’s securities be revoked

On September 15, 2011, the staff of the SEC informed the Company that it intended to recommend that the SEC institute a public administrative proceeding against the Company for alleged violations of Section 13(a) of the Securities Exchange Act of 1934 and Rules 13a-1 and 13a-13 or 13a-16 promulgated thereunder. On October 7, 2011, the SEC issued an Order Instituting Proceedings to determine whether it was necessary and appropriate to suspend or revoke the registration of the Company’s securities. On February 22, 2012, the administrative law judge overseeing the proceedings issued a decision ordering that the registration of the Company’s securities be revoked. On March 26, 2012, the SEC granted the Company’s petition for review of this decision. The results of the SEC’s review are pending as of ~~December~~February 2413, ~~2012~~2013.

17. BUSINESS SEGMENTS

The Company operates two business segments for the three and nine months ended ~~June~~December 3031, 2012 and 2011, which are retail probiotics products as a health supplement and bulk additives for institutional customers in the PRC. The following is the summary information by segment as of ~~June~~December 3031, 2012 and 2011, and for the three and nine months ended ~~June~~December 3031, 2012 and 2011:

Three months ended June 30, 2012

Retail products

Bulk additives

Segment Total

Corporate

Total

Three months ended December 31, 2012

Retail products

Bulk additives

Segment Total

Corporate

Total

Net revenue

29,~~504~~700,~~098~~472

14,~~878~~979,~~385~~670

1724,~~382~~680,~~483~~142

Income (loss) from operations

~~(798~~4,~~110~~578,551

)

46,~~177~~216,~~147~~201

310,~~379~~794,~~037~~752

(~~970~~965,~~393~~309

)

29,~~408~~829,~~644~~443

Income taxes

~~232~~804,~~504~~839

~~836~~678,~~468~~344

1,~~068~~483,~~972~~183

Total assets

~~101~~117,~~639~~602,~~937~~416

~~105~~113,~~876~~263,~~492~~555

~~207~~230,~~516~~865,~~429~~971

4847,~~703~~116,~~716~~609

~~256~~277,~~220~~982,~~145~~580

Depreciation and amortization

~~264~~274,~~545~~212

~~728~~836,~~440~~801

~~928~~1,~~985~~111,013

210,~~624~~878

1,~~203~~321,~~609~~891

Three months ended June 30, 2011

Retail products

Bulk additives

Segment Total

Corporate

Total

Three months ended December 31, 2011

Retail products

Bulk additives

Segment Total

Corporate

Total

Net revenue

414,~~542~~269,~~098~~805

48,~~417~~131,~~127~~650

822,~~959~~401,~~225~~455

Income (loss) from operations

(16,~~237~~675,~~469~~272

)

903,~~328~~882,732

(110,~~147~~558,~~141~~004

)

(~~996~~858,~~880~~836

)

(29,~~144~~699,~~021~~168

)

Income taxes

-380,347

41476,~~908~~920

-857,267

41857,~~908~~267

Total assets

~~110~~134,~~350~~859,~~819~~813

7784,~~486~~508,~~943~~123

~~187~~219,~~837~~367,~~762~~936

4319,~~561~~167,~~211~~546

~~231~~238,~~398~~535,~~973~~482

Depreciation and amortization

~~303~~259,~~916~~049

~~303~~561,~~972~~551

~~607~~820,~~888~~600

~~194~~196,~~012~~964

~~801~~1,~~900~~017,564

Nine months ended December 31, 2012	Retail products		Bulk additives		Segment Total		Corporate			Total

Net revenue	$	16,913,709	$	45,300,770	$	62,214,479	$	-		$	62,214,479
Income (loss) from operations		4,872,955		16,168,632		21,041,587		(2,905,249	)		18,136,338
Income taxes		1,286,705		2,139,038		3,425,743		-			3,425,743
Total assets		117,602,416		113,263,555		230,865,971		47,116,609			277,982,580
Depreciation and amortization		777,529		2,322,435		3,099,964		642,068			3,742,032

Nine months ended December 31, 2011	Retail products			Bulk additives		Segment Total			Corporate			Total

Net revenue	$	19,556,574		$	15,954,207	$	35,510,781		$	-		$	35,510,781
Income (loss) from operations		(4,509,625	)		2,838,585		(1,671,040	)		(2,761,095	)		(4,432,135	)
Income taxes		380,347			518,828		899,175			-			899,175
Total assets		134,859,813			84,508,123		219,367,936			19,167,526			238,535,462
Depreciation and amortization		830,047			1,168,490		1,998,537			585,102			2,583,639

Reconciliation is provided for unallocated amounts relating to corporate operations, which is not included in the segment information.

	Three months ended June 30,
	Three months ended December 31,						Nine months ended December 31,
Reconciliation	2012			2011			2012			2011
Total segment operating income	$	310,~~379~~794,~~037~~752		$	(110,~~147~~558,~~141~~004	)	$	21,041,587		$	(1,671,040	)
Corporate overhead expenses		(~~970~~965,~~393~~309	)		(~~996~~858,~~880~~836	)		(2,905,249	)		(2,761,095	)
Other income, net		~~732~~580,~~291~~324			~~128~~266,~~899~~243			2,004,049			521,996
Income tax expense		(1,~~068~~483,~~972~~183	)		(41857,~~908~~267	)		(3,425,743	)		(899,175	)
Total consolidated net income (loss)	$	28,~~071~~926,~~963~~584		$	(29,~~057~~108,~~030~~144	)	$	16,714,644		$	(4,809,314	)

18. SUBSEQUENT EVENTS

Short term loan

On September 19, 2012, a loan from the Bank of China for $3,165,058 (RMB 20,000,000) was borrowed with the same terms, secured by the same assets, corporate headquarters office building of Growing (see Note10), and is due on September 19, 2013. Interest is 7.08% per annum, based on 118% of the twelve months’ of RMB borrowing prime rate established by the People’s Bank of China at the time of funding, and is due at the end of each calendar quarter. The loan is renewable with the bank upon maturity.

Long term loan

On September 17, 2012, the Company received a loan from Shanghai Rural Commercial Bank for $158,253 (RMB 1,000,000), secured by the land use right in Qingpu of Growing (see Note 9), due December 17, 2014. Interest is 7.36% per annum, based on 118% of one year’s of RMB borrowing prime rate established by the People’s Bank of China at the time of funding, and is due at the end of each calendar quarter. The purpose of this loan was for financing the costs of renovation project.

On September 26, 2012, the Company received a loan from Shanghai Rural Commercial Bank for $158,253 (RMB 1,000,000), secured by the land use right in Qingpu of Growing (see Note 9), due December 26, 2014. Interest is 7.36% per annum, based on 118% of one year’s of RMB borrowing prime rate established by the People’s Bank of China at the time of funding, and is due at the end of each calendar quarter. The purpose of this loan was for financing the costs of renovation project.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, contains forward-looking statements which involve risks and uncertainties, including statements regarding our capital needs, business strategy and expectations. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “will,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “forecast,” “project” or “continue,” the negative of such terms or other comparable terminology.

You should not rely on forward-looking statements as predictions of future events or results. Any or all of our forward-looking statements may turn out to be wrong. They can be affected by inaccurate assumptions, risks and uncertainties and other factors which could cause actual events or results to be materially different from those expressed or implied in the forward-looking statements. In evaluating these statements, you should consider various factors, including the risks described in this Form 10-Q under “Risk Factors” and elsewhere. These factors may cause our actual results to differ materially from any forward-looking statement. In addition, new factors emerge from time to time and it is not possible for us to predict all factors that may cause actual results to differ materially from those contained in any forward-looking statements. We disclaim any obligation to publicly update any forward-looking statements to reflect events or circumstances after the date of this report, except as required by applicable law.

Except as otherwise indicated by the context, references in this Quarterly Report on Form 10-Q to “we,” “us,” and “our” are to the combined business of China-Biotics, Inc. (the “Company”) and to the Company’s wholly owned direct subsidiaries, Sinosmart Group Inc. (“SGI”), Growing State Limited (“GSL”) and King Treasure Group Limited (“KTG”); SGI’s wholly owned subsidiary, Shanghai Shining Biotechnology Co. Ltd. (“Shining”); GSL’s wholly owned subsidiary, Growing Bioengineering (Shanghai) Co. Ltd. (“Growing”); KTG’s wholly owned subsidiary, Best Design Holdings Limited (“BDH”); and BDH’s wholly owned subsidiary, Growing Bio (Yangling) Co. Ltd (“Growing Yangling”). References to “China” or to the “PRC” are references to the People’s Republic of China. All references to “dollars” or “$” refers to United States dollars.

Overview

We manufacture and sell probiotics products. Probiotics comprise mainly live bacteria, which we produce using advanced proprietary fermentation technology. Currently, our products are sold primarily in the Chinese domestic market.

Our retail products are mainly sold to distributors, who then distribute them to various retail outlets such as drug stores and supermarkets or sell directly to enterprise accounts. Typically, 60 to 90 days’ credit is given to the distributors. Our bulk additives products are primarily sold to institutional customers, such as dairy manufacturers, animal feed manufacturers, pharmaceutical companies, and food companies. Typically, 60 to 90 days’ credit is given to the bulk additives products customers. Because of the adverse market environment, the Company has temporarily extended an additional 30 days’ credit to all distributors of retail products and customers of the bulk additives products. As a result, the collection period has also been extended a further 30 days to 120 days.

Because of the increasing cost of rents and sales personnel in recent years, since January 2011 we have expanded our retail product sales in China through our growing distribution network and via internet sales. Our management believes that as China has become more affluent, the number of Chinese internet users has increased and Chinese citizens have become more health conscious, resulting in higher demand for healthy and functional foods such as probiotics and yogurt.

As ~~our~~Our retail products comprise mainly live bacteria, which are reproduced by fermentation,. weWe have historically had a low cost of production, of which packaging costs, including the cost of capsules, represent the largest cost item. During April to June 2012, there was a public health issue relating to so-called “poison capsules” in China that adversely affected all related industries that produce or distribute products in capsule form, including the food and additive markets. For safety purposes, all companies in these affected sectors, including the Company (which has not been linked to any defective or dangerous capsules) suspended the production of products in capsule form until the completion of required government inspection and approval for resuming production. After the clearance of the “poison capsules” issue, the Company gradually improved its sales of retail products during the three months ended December 31, 2012. Our retail sales for the three months ended ~~June~~December 31, 2012 increased 22% over the six months ended September 30, 2012. ~~were~~Although ~~affected~~the retail sales have returned to what the Company believes is a reasonable level, there ~~and~~was ~~decreased~~decrease 46in retail sales of 14% for the nine months ended December 31, 2012 compared with the same period ~~the~~in ~~prior year~~2011. ~~After~~This is primarily attributable to the ~~clearance~~recapture of ~~“poison~~sales ~~capsule~~for ~~issue”~~the three months ended December 31, ~~sales~~2011 ofafter the ~~Company’s~~implementation ~~retail~~of new rules and regulations on health care products, inincluding ~~capsule~~our ~~form rebounded~~probiotics ~~significantly~~products, in the ~~three~~PRC, ~~months~~during ~~ended~~the ~~September~~beginning ~~30,~~of ~~2012~~2011.

Recently, Shining Probiotics Protein Powder has become our best-selling product, representing approximately 34% and 39% of our total sales of our retail products for the three months ended June 30, 2012 and 2011, respectively. Although we have released new products, the percentage contribution of Shining Essence, for many years our biggest-selling retail product, to our total retail sales has decreased, representing approximately 26% and 21% for the three months ended June 30, 2012 and 2011, respectively. Shining Essence is still one of our top three best-selling products. As of June 30, 2012, we had a retail product portfolio of 46 products, and we are currently selling 14 of them in the market.

~~Sales~~Recently, ofShining Probiotics Protein Powder has become our ~~bulk products~~best-selling ~~contributed~~product, 86representing approximately 36% and 38% of our ~~gross~~total ~~revenue~~sales of our retail products for the ~~three~~nine months ended ~~June~~December 3031, 2012 and ~~contributed~~2011, respectively. As we have released new products, the percentage contribution of Shining Essence, for many years our biggest-selling retail product, to anour ~~increase~~total inretail sales has decreased, representing ofapproximately ~~over~~27% 83and 21% ~~from~~for the ~~same~~nine ~~period~~months inended December 31, 2012 and 2011, respectively. Shining Essence is still within the top three of our best-selling products. As of December 31, 2012, we had a retail product portfolio of 46 products, and we are currently selling 14 of them in the market.

Sales of our bulk products contributed 76% of our gross revenue for the nine months ended December 31, 2012 and contributed to an increase in sales of over 100% from the same period in 2011.

In February 2010, our new bulk production facility in Qingpu commenced commercial production. The state-of-the-art bulk additives production facility has a full capacity of 150 metric tons. Management believes our new facility will help us to continue to meet the increasing market demand for high quality and low cost products.

Our management believes that the following trends in China will have an important impact on, and present significant opportunities for, our business:

Increasing demand for functional food and health supplement products. As the discretionary income and health-consciousness of the average Chinese consumer increase, we expect the demand for functional foods and health supplements to increase.

· Curtailment of the use of antibiotics and preservatives and government support for probiotics. China has the highest per capita consumption of antibiotics in the world. To curtail the overuse of antibiotics, the Chinese government has taken steps to limit the use of antibiotic drugs and preservatives for both humans and animals. Moreover, the Chinese State Food and Drug Administration has also acknowledged that probiotics are beneficial for human health. Recently, the Ministry of Health (MOH) in China announced an expanded list of probiotics strains allowed to be used in the food industry. The number of probiotics strains on the list has doubled. Management believes that this reflects that the Chinese government is encouraging wider uses of probiotics products in the food industry. Management also believes that it also demonstrates the rapidly expanding probiotics market in China.

Increasing demand for dairy product additives. The demand for functional foods and foods that use probiotics supplements is growing at a significant rate, and our management believes that it will continue to do so. According to statements made by the Nutrition Development Centre of National Development and Reform Commission in China, effective April 1, 2007, probiotics would be required to be added to baby milk powders produced in China. On October 24, 2011, the MOH published a list of probiotics applicable for baby food for babies aged one year or older.

Our management expects to capitalize on the opportunities created by these trends to achieve significant growth through the following:

· We are currently focused on two fast-growing industries in China: the dairy and animal feed sectors. As of ~~June~~December 3031, 2012, we had entered into contracts with 88135 customers, up from 71 customers at March 31, 2012, for the bulk additives business. In this regard, we have created a number of formulations for testing by many potential customers. We have established business relationships with a variety of commercial customers located in major cities, including Beijing, Tianjin, Chongqing, and Shanghai. During the ~~three~~nine months ended ~~June~~December 3031, 2012, we developed sales plans for new customers in four additional provinces: Gansu, Hebei, Heilongjiang and Shanxi. Besides the major cities mentioned above in which we do business, our customers are now in 2022 provinces, including Guangdong, Jiangsu and Jiangxi, among others. These growing companies are among the leaders in the dairy, animal feed, baked foods, and pharmaceutical industries.

Construction of a new facility in Yangling - Encouraged by the growing demand for the animal feed market in China, the Company commenced construction of a new facility in the Yangling Zone in the Shaanxi Province of China in June 2012. The cost for constructing the Yangling facility is expected to be over $58 million invested over two years. The facility will produce probiotics and probiotics-related biological additives for the animal feed industry. Currently, the facility is in the construction stage, and the plan is subject to government approval prior to implementation. During the year ended March 31, 2011, the Company made total payments of approximately $3.25 million (RMB 20,608,112) to acquire the land use right of approximately 122,600 square meters (183.94 mu). We received the land use right certificate on January 28, 2012 and commenced construction in June 2012. We expect to complete construction by June 2014 and trial production is expected to commence in 2015. In the existing market environment, the Company will utilize its available cash and bank facilities to fund such construction.

· Wholesale and e-commerce businesses - In our continuing effort to transition from a retail, business-to-consumer model to a wholesale, business-to-business model, and to improve operating efficiency, we have completed the consolidation of our retail outlets. We closed all of our retail outlets by the end of fiscal year 2011, as we believe our distribution network is more efficient for our retail products sales. We have a total of 39 distributors for retail products as of June 30, 2012. In light of increasing online sales of health food and supplements in China and to maintain our existing retail customer base, we launched a “Community Network,” which is dedicated to promoting and selling our retail products online through the Company’s website at http://www.shiningbt.com/Product/. Since its establishment, the in-house e-commerce department is working to better access the market and existing and potential customers. We have also been working with two online selling companies to sell our retail products, including www.ule.com.cn and www.yihaodian.com. In addition, we have established a customer service center to reply to inquiries from our end users.

Wholesale and e-commerce businesses - In our continuing effort to transition from a retail, business-to-consumer model to a wholesale, business-to-business model, and to improve operating efficiency, we have completed the consolidation of our retail outlets. We closed all of our retail outlets by the end of fiscal year 2011, as we believe our distribution network is more efficient for our retail products sales. We have a total of 43 distributors for retail products as of December 31, 2012. In light of increasing online sales of health food and supplements in China and to maintain our existing retail customer base, we launched a “Community Network,” which is dedicated to promoting and selling our retail products online through the Company’s website at http://www.shiningbt.com/Product/. Since its establishment, the in-house e-commerce department is working to better access the market and existing and potential customers. We have also been working with two online selling companies to sell our retail products, including www.ule.com.cn and www.yihaodian.com. In addition, we have established a customer service center to reply to inquiries from our end users.

Improvement in research and development of new products and services - We continue to develop new retail products aimed at improving general human health conditions, enhancing the immune system, and reducing health problems. To further improve our competitiveness in the bulk additives market, we continue to improve and provide our value-added service to institutional customers by assisting their lab and production testing and providing customized technical support, among other things. In addition, we are also working with certain universities, including Northeast Agricultural University, to carry out research and development projects in order to seek to increase the probiotics industry’s capability.

Our operations are generally not labor-intensive. We employed ~~372~~350 people as of ~~June~~December 3031, 2012. With production ramping up in the Phase 1 facility ~~and~~ and the construction of Phase 2 in Qingpu, we expect increases in our number of employees over the next two years to meet the ~~increase~~ increase of production capacity and sales demand. We have also been recruiting senior executives to strengthen our management team. However, as wages in China remain relatively low, we expect that labor costs will not materially affect our results of operations in the near term.

Results of Operations for the Three Months Ended ~~June 30,~~December 31, 2012 Compared with the Three Month Ended ~~June~~December 3031, 2011

Our results for the three months ended ~~June~~December 3031, 2012 and 2011 are summarized below:

	Three months ended June 30,
	Three months ended December 31,
	2012 Amount			% of Net sales			2011 Amount			% of Net sales
Net sales	$	1724,~~382~~680,~~483~~142			100.00	%	$	822,~~959~~401,~~225~~455			100.00	%
Cost of sales		78,~~278~~823,~~378~~814			4135.8775	%		48,~~482~~933,~~416~~894			5039.0388	%
Gross profit		1015,~~104~~856,~~105~~328			5864.1325	%		413,~~476~~467,~~809~~561			4960.9712	%
Operating expenses:
Selling expenses		42,~~036~~635,~~365~~966			2310.2268	%		1328,~~970,169~~459			211.9947	%
General and administrative expenses		3,~~659~~390,~~096~~919			2113.0574	%		43,~~650~~439,~~661~~934			5115.9136	%
Total operating expenses		76,~~695~~026,~~461~~885			4424.2742	%		63,~~620~~768,~~830~~393			7316.9082	%
Income (loss) from operations		2,408,644			13.86	%		(2,144,021	)		(23.93	)%
Income from operations		9,829,443			39.83	%		9,699,168			43.30	%
Other income and expense:
Interest expense		(~~145~~198,~~460~~705	)		(0.8481	)%		(~~270~~16	)		(0.00	)%
Interest income		~~194~~146,~~973~~228			10.1259	%		~~387~~372,~~940~~918			41.3366	%
Interest income, net – loan receivable		776,~~683~~233			43.4715	%		-			-
Other expenses		(~~102~~131,~~892~~393	)		(0.5953	)%		(~~221~~90,~~636~~695	)		(20.4740	)%
Exchange gain (loss), net		8(12,~~987~~039	)		(0.05	)%		(3715,~~135~~964	)		(0.4107	)%
Total other income		~~732~~580,~~291~~324			42.2135	%		~~128~~266,~~899~~243			1.4419	%
Income (loss) before taxes		3,140,935			18.07	%		(2,015,122	)		(22.49	)%
Income before taxes		10,409,767			42.18	%		9,965,411			44.49	%
Income taxes		1,~~068~~483,~~972~~183			6.1501	%		41857,~~908~~267			03.4783	%
Net income (loss)	$	2,071,963			11.92	%	$	(2,057,030	)		(22.96	)%
Net income	$	8,926,584			36.17	%	$	9,108,144			40.66	%

Net sales

Net sales ~~in our financial statements~~ are stated at invoiced value less sales discount and sales tax, and also included the return of deposits of $1,947,075 (RMB 12,243,207) for recovery of special concession credits discussed below. Our net sales for the three months ended ~~June~~December 3031, 2012 and 2011 comprised the following:

	Three months ended June 30,
	Three months ended December 31,
	2012			2011
Invoiced value of sales	$	1723,~~779~~177,~~164~~428		$	923,~~482~~346,~~794~~810
Less: Sales discount		(~~261~~289,~~896~~862	)		(~~486~~779,~~360~~239	)
Less: Sales tax		(~~134~~154,~~785~~499	)		(37166,~~209~~116	)
	$	1722,~~382~~733,~~483~~067		$	822,~~959~~401,~~225~~455
Return of deposits		1,947,075			-
	$	24,680,142		$	22,401,455

Net sales increased by $82,~~423~~278,~~258~~687 or 9410.0217% to $1724,~~382~~680,~~483~~142 for the three months ended ~~June~~December 3031, 2012 from $822,~~959~~401,~~225~~455 for the three months ended ~~June~~ 30December 31, 2011. The increase was mainly attributable to the increase of the sales of bulk additive products ~~which~~and ~~was enough to compensate for~~ the ~~decrease in sales~~ recovery of ~~retail~~special ~~products~~concession ~~due~~credits ~~to the occurrence~~ of ~~the~~$1,947,075 ~~“poison~~(RMB ~~capsule~~12,243,207) ~~issue”~~discussed ~~in China during April to June 2012~~below.

~~The~~Excluding the recovery of special concession credits of $1,947,075 (RMB 12,243,207), the contributions of our products as a percentage of invoiced value on sales for the three months ended ~~June~~December 3031, 2012 and 2011, respectively, are summarized below.

	Three months ended June 30,
	Three months ended December 31,
	2012			2011
Retail products		1434.4111	%		5063.70	%
Bulk additives		8565.5989	%		4936.30	%
		100.00	%		100.00	%

Unit volume and unit prices comparatives (on the invoiced value of sales) for the three months ended ~~June~~December 3031, 2012 and 2011 are summarized below.

	Percentage increase (decrease) from the prior year
	Three months ended June 30,
	Three months ended December 31,
	2012									2011
	Unit volume			Selling prices			Overall increase / (decrease)			Unit Volume			Selling prices			Overall increase / (decrease)
Retail products		(4552.51	)%		(211.20	)%		(4647.19	)%		(7534.49	)%		2216.88	%		(6923.43	)%
Bulk additives		~~153~~94.22	%		13(5.94	)%		~~186~~82.68	%		(4655.52	)%		~~(25~~17.06	)%		(6047.94	)%

Based on the invoiced value of sales, the ~~retail~~bulk additive products invoiced sales ~~contributions~~contribution ~~decreased~~increased to 1465.4189% in the three months ended ~~June~~December 3031, 2012 from 50 36.7030% in the three months ended ~~June~~December 3031, 2011. The ~~decrease~~increase was mainly attributable to the ~~occurrence~~growth of the ~~“poison capsule issue” in China during April to June 2012, as noted above. Compared with our retail products, our~~ bulk additive ~~products~~ ~~were not directly impacted by the poison capsule issue. Further, as we have developed more bulk~~ products ~~customers,~~and the ~~increased sales~~transition of ~~bulk~~the ~~additive~~Company’s ~~products~~business ~~have~~model ~~more~~from ~~than~~primarily ~~compensated~~retail ~~for~~focused ~~the~~to ~~decrease~~primarily inwholesale ~~sales of retail products~~focused.

Cost of sales

Cost of sales for the three months ended ~~June~~December 3031, 2012 was $78,~~278~~823,~~378,~~814 compared with $48,~~482~~933,~~416~~894 for the three months ended ~~June~~December 3031, 2011. The ~~increase~~ slightly decrease in cost of sales was ~~primarily~~normal ~~caused~~fluctuation ~~by the increase in sales~~ for the three months ended ~~June~~December 3031, 2012.

Unit volume and unit ~~cost~~costs comparatives for the three months ended ~~June~~December 3031, 2012 and 2011 are summarized below.

	Percentage increase (decrease) from the prior year
	Three months ended June 30,
	Three months ended December 31,
	2012									2011
	Unit volume			Unit Costs			Overall increase / (decrease)			Unit Volume			Unit Costs			Overall increase / (decrease)
Retail products		(4552.51	)%		914.46	%		(4145.64	)%		(7534.49	)%		~~(78~~36.82	)%		(5610.36	)%
Bulk additives		~~153~~94.22	%		13(8.39	)%		~~186~~77.92	%		(4655.52	)%		633.19	%		(4340.76	)%

Cost of product returns

~~For~~As a result of a product returns after certain of our products did not meet our quality standards, and in order to improve the ~~three~~confidence ~~months~~of the Company’s ~~ended~~distributors ~~June~~and 30end-user customers in our probiotics products, we provided special concession credits to our distributors during August 2011, ~~product~~to ~~returns~~address the complaints and concerns of ~~$474,505~~customers worried about food and healthcare products in the PRC. Such credits were ~~deducted~~made ~~from~~available ~~sales~~for ~~due~~our distributors to reimburse end-user customers for products which were recalled. We treated these credits as being comparable to a ~~batch~~warranty ofon our probiotics products, ~~produced~~and inwe ~~June~~incurred a cost of $7,143,914 for these credits for the three months ended September 30, 2011. ~~that~~No additional such credits were ~~below~~made available for the three months ended December 31, 2012. During the three months ended December 31, 2012, the Company’s ~~quality~~recovered ~~standards~~special ~~due~~concession credits amounting to ~~production~~$1,947,075 ~~problems~~(RMB 12,243,207) and recognized such amounts as sales for the period.

As a result of a product return after certain of our products did not meet our quality standards, and in order to improve the confidence of the Company’s distributors and end-user customers in our probiotics products, we provided special concession credits to our distributors during August 2011 to address the complaints and concerns of customers worried about food and healthcare products in the PRC. Such credits were made available for our distributors to reimburse end-user customers for products which were recalled. We treated these credits as being comparable to a warranty on our probiotics products, and we incurred a cost of $7,162,229 for these credits for the year ended March 31, 2012. No additional such credits were made available for the three months ended June 30, 2012.

Gross profit

Gross profit increased by $52,~~627~~388,~~296~~767 or ~~125~~17.7074% to $1015,~~104~~856,~~105~~328 for the three months ended ~~June~~December 3031, 2012, from $413,~~476~~467,~~809~~561 for the three months ended ~~June~~ 30December 31, 2011. The increase was mainly attributable to the increase in sales volume of bulk additive products, recovery of special concession credits of $1,947,075 (RMB 12,243,207), and no significant product returns for the three months ended ~~June~~ 30December 31, 2012.

Selling expenses

Selling expenses increased by $2,~~066~~307,~~196~~507 or ~~104~~702.8753% to $42,~~036~~635,~~365~~966 or 2310.2268% of net sales for the three months ended ~~June~~December 3031, 2012, compared with $1328,~~970,169~~459 or 211.9947% of net sales for the three months ended ~~June~~December 3031, 2011. The increase was mainly attributable to the issuance of sales commission to staff who ~~are~~ engaged in the sales and collection of outstanding balances from ~~our~~the customers for the three months ended December 31, 2012.

General and administrative expenses

General and administrative expenses slightly decreased by $~~991~~49,~~565~~015 or 211.3242% to $3,~~659~~390,~~096~~919 or 2113.0574% of net sales for the three months ended ~~June~~December 3031, 2012, ~~compared~~ compared with $43,~~650~~439,~~661~~934 or 5115.9136% of net sales for the three months ended ~~June~~December 3031, 2011. The slight decrease in general and administrative expenses was mainly attributable to anincrease ~~allowance~~of research expenses of $119,150 and set off by decrease of allowance for doubtful accounts of $~~404~~172,~~679~~824 for the three months ended ~~June~~December 3031, ~~2011~~2012.

Income ~~(loss)~~ from operations

Income from operations increased by $4130,~~552,665~~275 or 1.34% to $29,~~408~~829,~~644~~443 for the three months ended ~~June~~December 3031, 2012, from ~~losses from operations of~~ $29,~~144~~699,~~021~~168 for the three months ended ~~June~~December 3031, 2011. The increase is mainly attributable to the increase in sales and increase inof gross profit ~~for~~off setting by the increase of operating expenses stated above for the three months ended ~~June~~December 3031, 2012.

Total other income

Total other ~~income~~ income increased by $~~603~~314,~~391~~081 or ~~468~~117.1197% to $~~732~~580,~~290~~324 for the three months ended ~~June~~December 3031, 2012, from $~~128~~266,~~899~~243 for the three months ended ~~June~~ 30December 31, 2011. The increase is mainly attributable to the investment income ~~for~~from a trust and is net of the relevant handling fee amounting to $776,~~683~~233 and off-set the increase of interest expenses on loans to $198,705 for the three months ended ~~June~~December 3031, 2012.

Income taxes

Provision for income taxes was $1,~~068~~483,~~972~~183 and $41857,~~908~~267 for the three months ended ~~June~~December 3031, 2012 and 2011, respectively. The increase in the provision for income taxes is primarily attributable to ~~the~~ increase in operating profit and increase of effective tax rate by termination of tax incentives on Shining for the three months ended December 31, 2012.

Net income ~~(loss)~~

Net income ~~increased~~decreased by $4181,~~128,993~~560 or 1.99% to $28,~~071~~926,~~963~~584 for the three months ended ~~June~~December 3031, 2012 from ~~net loss of~~ $29,~~057~~108,~~030~~144 for the three months ended ~~June~~December 3031, 2011. The ~~increase~~decrease of net income is mainly attributable to the increase of ~~income~~effective ~~from~~tax ~~operations~~rate ofstated ~~$4,552,665~~above.

Segment reporting

We have adopted the “products and services” approach for segment reporting. For ~~fiscal~~three ~~years~~months ended December 31, 2012 and 2011, the management considers there to be two reporting segments: retail products and bulk additive products, as the new bulk production plant commenced ~~operations~~ operations in February 2010 with a separate production and distribution channel. There are also separate operational management teams and operations and marketing strategies for each segment. Therefore, we have used the segment reporting since ~~year~~fiscal year 2011.

Retail products

The results of retail products segment for the three months ended ~~June~~December 3031, 2012 and 2011 are summarized as below:

	Three months ended June 30,
	Three months ended December 31,
	2012 Amount			% of Net sales				2011 Amount				% of Net sales
	2012			% of				2011		% of
Net sales, retail products	$	2,504,098			100.00	%		$	4,542,098				100.00	%
	Amount			Net sales				Amount		Net sales
Cost of sales		1,281,644			51.18	%			2,601,341				57.27	%
Net sales, retail products	$	9,700,472			100.00	%	$	14,269,805			100.00	%
Gross profit, retail products		1,222,454			48.82	%			1,940,757				42.73	%
Cost of sales		3,191,809			32.90	%		5,800,233			40.65	%
Operating expenses:
Gross profit, retail products		6,508,663			67.10	%		8,469,572			59.35	%
Selling expenses		905,989			36.18	%			1,133,071				24.95	%
Operating expenses:
General and administrative expenses		1,114,575			44.51	%			2,045,155				45.03	%
Selling expenses		1,108,362			11.43	%		710,231			4.98	%
Total operating expenses		2,020,564			80.69	%			3,178,226				69.97	%
General and administrative expenses		821,750			8.47	%		1,084,069			7.60	%
Losses from operations, retail products	$	(798,110	)		(31.87	)%		$	(1,237,469	)			(27.24	)%
Total operating expenses		1,930,112			19.90	%		1,794,300			12.57	%
Income from operations, retail products	$	4,578,551			47.20	%	$	6,675,272			46.78	%

Net sales

Net sales in our financial statements are stated at invoiced value less sales discount and sales tax, and also included the return of deposits of $1,947,075 (RMB 12,243,207) for recovery of special concession credits discussed below. Our net sales for the ~~fiscal~~three ~~years~~months ended December 31, 2012 and 2011 comprised the following:

	Three months ended June 30,
	2012			2011
Invoiced value on sales	$	2,787,346		$	5,050,905
Less: Sales discount		(261,896	)		(486,360	)
Less: Sales tax		(21,352	)		(22,447	)
	$	2,504,098		$	4,542,098

Net sales decreased by $2,038,000 or 44.87% to $2,504,098 for the three months ended June 30, 2012 from $4,542,098 for the three months ended June 30, 2011. The decrease in sales of retails products is preliminary attributable to the occurrence of the “poison capsule issue” during April to June 2012. According to special guidelines from the Chinese government, all companies involved in the production or use of capsules in products sold by such companies were required to suspend production temporarily, and the production and sale of products containing or utilizing capsules was fully inspected by the government to ensure all relevant standards were met before restarting production. Therefore, both the production operation and sales of our retail products were affected during this period. Following the successful completion of the inspection processes, the Company’s operations involving capsules returned to normal. Sales of the Company’s capsule products rebounded in the following quarter.

	Three months ended December 31,
	2012			2011
Invoiced value on sales	$	8,109,294		$	15,167,950
Less: Sales discount		(289,862	)		(779,239	)
Less: Sales tax		(66,035	)		(118,906	)
	$	7,753,397		$	14,269,805
Return of deposits		1,947,075			-
	$	9,700,472		$	14,269,805

Net sales decreased by $4,569,333 or 32.02% to $9,700,472 for the three months ended December 31, 2012 from $14,269,805 for the three months ended December 31, 2011. The decrease in sales of retails products is primarily attributable to the recapture of sales for the three months ended December 31, 2011 after the adoption of the implementation of new rules and regulations on health care products by the government of the PRC during such period.

Cost of sales

Cost of sales decreased by $12,~~319~~608,~~697~~424 or 5044.7397% to $13,~~281~~191,~~644~~809 for the three months ended ~~June~~December 3031, 2012 from $25,~~601~~800,~~341~~233 for the three months ended ~~June 30~~December 31, 2011. The decrease in cost of sales was primarily caused by the ~~decrease~~higher costs associated with the recapture of products sold and ~~decreased~~increased production activities during the three months ended ~~June~~December 3031, ~~2012~~2011.

Cost of product returns

~~For~~As a result of a product returns after certain of our products did not meet our quality standards, and in order to improve the ~~three~~confidence ~~months~~of the Company’s ~~ended~~distributors ~~June~~and 30end-user customers in our probiotics products, we provided special concession credits to our distributors during August 2011, ~~product~~to ~~returns~~address the complaints and concerns of ~~$474,505~~customers worried about food and healthcare products in the PRC. Such credits were ~~deducted~~made ~~from~~available ~~sales~~for ~~due~~our distributors to reimburse end-user customers for products which were recalled. We treated these credits as being comparable to a ~~batch~~warranty ofon our probiotics products, ~~produced~~and inwe ~~June~~incurred a cost of $7,143,914 for these credits for the nine months ended December 31, 2011. ~~that~~No additional such credits were ~~below~~made available for the three months ended December 31, 2012. During the three months ended December 31, 2012, the Company’s ~~quality~~recovered ~~standards~~special ~~due~~concession credits amounting to ~~production~~$1,947,075 ~~problems~~(RMB 12,243,207) and recognized such amounts as sales for the period.

As a result of a product returns after certain of our products did not meet our quality standards, and in order to improve the confidence of the Company’s distributors and end-user customers in our probiotics products, we provided special concession credits to our distributors during August 2011 to address the complaints and concerns of customers worried about food and healthcare products in the PRC. Such credits were made available for our distributors to reimburse end-user customers for products which were recalled. We treated these credits as being comparable to a warranty on our probiotics products, and we incurred a cost of $7,162,229 for these credits for the year ended March 31, 2012. No additional such credits were made available for the three months ended June 30, 2012. During the three months ended September 30, 2012, the Company recovered special concession credits amounting to $993,671 (RMB6,280,000) and recognized such amounts in sales for the period.

Gross profit

Gross profit decreased by $~~718~~1,~~303~~960,909 or 3723.0115% to $16,~~222~~508,~~454~~663 for the three months ended ~~June~~December 3031, 2012 from $18,~~940~~469,~~757~~572 for the three months ended ~~June 30,~~December 31, 2011. The decrease in gross profit was primarily caused by the decrease of products sold ~~and~~for ~~also~~ the ~~write-off~~three ofmonths aended ~~special payment~~December to31, ~~distributors~~2012, ~~which~~and wealso ~~consider~~the arecapture ~~cost~~ of ~~the~~sales ~~product returns~~ described above for the three months ended ~~June~~December 3031, 2011.

Selling expenses

Selling expenses were $~~905~~1,~~989~~108,362 or 3611.1843% of net sales for the three months ended ~~June~~December 3031, 2012, compared with $1710,~~133,071~~231 or 244.9598% of net sales for ~~the~~ the three months ended ~~June~~December 3031, 2011. The selling expenses mainly included salary and advertising expenses. This ~~decrease~~increase in ~~selling~~ selling expenses was primarily attributable to aan ~~decrease~~increase in ~~sales~~promotion activities.

General and administrative expenses

General and administrative expenses decreased by $~~930~~262,~~580~~319 or 4524.5020% to $1821,~~114,575~~750 or 448.5147% of net sales for the three months ended ~~June~~December 3031, 2012 compared with $21,~~045~~084,~~155~~069 or 457.0360% of net sales for the three months ended ~~June~~December 3031, 2011. The decrease in general and administrative ~~expenses~~ expenses was mainly ~~the~~attributable ~~result~~to ofa andecrease in allowance for doubtful accounts ofto $~~216~~0 for the three months ended December 31,~~468~~ 2012 from $221,045 for the three months ended ~~June~~December 3031, 2011.

~~Losses~~Income from operations

~~Losses~~Income from ~~operations~~ operations decreased by $~~439~~2,~~359~~096,721 or 31.41% to $~~798~~4,~~110~~578,551 for the three months ended ~~June~~December 3031, 2012 from $16,~~237~~675,~~469~~272 for the three months ended ~~June~~December 3031, 2011. The decrease is mainly attributable to a decrease in ~~operating~~sales ~~expenses~~ for the three months ended ~~June~~December 3031, 2012 ~~and~~compared ~~the write~~with ~~off of returned products and allowance for doubtful accounts incurred for~~ the three months ended ~~June~~December 3031, 2011.

Bulk products

The results of bulk additives products segment for the three months ended December 31, 2012 and 2011 are summarized as below:

	Three months ended December 31,
	2012 Amount		% of Net sales			2011 Amount			% of Net sales
Net sales, bulk additives products	$	14,979,670		100.00	%	$	8,131,650			100.00	%
Cost of sales		5,632,005		37.60	%		3,133,661			38.54	%
Gross profit, bulk additives products		9,347,665		62.40	%		4,997,989			61.46	%
Operating expenses:
Selling expenses		1,527,604		10.20	%		(381,771	)		(4.69	)%
General and administrative expenses		1,603,860		10.71	%		1,497,028			18.41	%
Total operating expenses		3,131,464		20.90	%		1,115,257			13.72	%
Income from operations, bulk additives products	$	6,216,201		41.50	%	$	3,882,732			47.75	%

Net sales

Net sales in our financial statements are stated at invoiced value less sales discount and sales tax. Our net sales for the three months ended December 31, 2012 and 2011 comprised the following:

	Three months ended December 31,
	2012			2011
Invoiced value on sales	$	15,068,134		$	8,178,860
Less: Sales tax		(88,464	)		(47,210	)
	$	14,979,670		$	8,131,650

Net sales increased by $6,848,020 or 84.21% to $14,979,670 for the three months ended December 31, 2012, from $8,131,650 for the three months ended December 31, 2011. The increase in sales of bulk additive products is primarily attributable to the growth of the business and market demand for additive products. As of December 31, 2012, we had entered into contracts with 135 customers, up from 71 customers at March 31, 2012 for the bulk additives business, adding 64 new customers or over a 90% increase.

Cost of sales

Cost of sales increased by $2,498,345 or 79.73% to $5,632,005 for the three months ended December 31, 2012, from $3,133,661 for the three months ended December 31, 2011. The increase in cost of sales was primarily caused by the increase in products sold for the three months ended December 31, 2012.

Gross profit

Gross profit increased by $4,349,676 or 87.03% to $9,347,665 for the three months ended December 31, 2012, from $4,997,989 for the three months ended December 31, 2011. The increase of gross profit was primarily caused by the increase in products sold for the three months ended December 31, 2012.

Selling expenses

Selling expenses were $1,527,604 or 10.20% of net sales for the three months ended December 31, 2012, compared with negative $381,771 for the three months ended December 31, 2011. The selling expenses mainly included advertising expenses, promotion expenses, commission and salary. This increase in selling expenses was primarily attributable to increase of commission to $756,229 for the three months ended December 31, 2012. In addition, the negative selling expenses in the three months ended December 31, 2011 included a reversal of an over provision of $1,194,981 for commission expenses for the three months ended December 31, 2011.

General and administrative expenses

General and administrative expenses were $1,603,860 or 10.71% of net sales for the three months ended December 31, 2012, compared with $1,497,029 or 18.41% of net sales for the three months ended December 31, 2011. The increase in general and administrative expenses was mainly attributable to an increase in research and development expenses to $744,859 for the three months ended December 31, 2012 from $619,321 for the three months ended December 31, 2011.

Income from operations

Income from operations increased by $2,333,469 or 60.10% to $6,216,201 for the three months ended December 31, 2012, from $3,882,732 for the three months ended December 31, 2011. The increase is mainly attributable to the increase of gross profit of $4,349,676 from the increase in sales net of the increase in selling expenses, and general and administrative expenses for the three months ended December 31, 2012 stated above.

Results of Operations for the Nine months Ended December 31, 2012 Compared with the Nine months Ended December 31, 2011

Our results for the nine months ended December 31, 2012 and 2011 are summarized below:

	Nine months ended December 31,
	2012 Amount			% of Net sales			2011 Amount			% of Net sales
Net sales	$	62,214,479			100.00	%	$	35,510,781			100.00	%
Cost of sales		23,833,844			38.31	%		16,656,068			46.90	%
Cost of product returns		-			-	%		7,143,914			20.12	%
Gross profit		38,380,635			61.69	%		11,710,799			32.98	%
Operating expenses:
Selling expenses		9,249,502			14.87	%		4,316,810			12.16	%
General and administrative expenses		10,994,795			17.67	%		11,826,124			33.30	%
Total operating expenses		20,244,297			32.54	%		16,142,934			45.46	%
Income (loss) from operations		18,136,338			29.15	%		(4,432,135	)		(12.48	)%
Other income and expense:
Interest expense		(477,101	)		(0.77	)%		(352	)		(0.00	)%
Interest income		474,447			0.76	%		1,158,779			3.26	%
Interest income, net – loan receivable		2,325,218			3.74	%		-			-
Other expenses		(318,705	)		(0.51	)%		(545,424	)		(1.54	)%
Exchange gain (loss), net		190			0.00	%		(91,007	)		(0.26	)%
Total other income		2,004,049			3.22	%		521,996			1.47	%
Income (loss) before taxes		20,140,387			32.37	%		(3,910,139	)		(11.01	)%
Income taxes		3,425,743			5.51	%		899,175			2.53	%
Net income (loss)	$	16,714,644			26.87	%	$	(4,809,314	)		(13.54	)%

Net sales

Net sales are stated at invoiced value less sales discount and sales tax, and also included the return of deposits of $2,940,746 (RMB 18,523,208) for recovery of special concession credits discussed below. Our net sales for the nine months ended December 31, 2012 and 2011 comprised the following:

	Nine months ended December 31,
	2012			2011
Invoiced value of sales	$	60,342,921		$	37,083,791
Less: Sales discount		(662,045	)		(1,349,479	)
Less: Sales tax		(407,143	)		(223,531	)
	$	59,273,733		$	35,510,781
Return of deposits		2,940,746			-
	$	62,214,479		$	35,510,781

Net sales increased by $26,703,698 or 75.20% to $62,214,479 for the nine months ended December 31, 2012 from $35,510,781 for the nine months ended December 31, 2011. The increase was mainly attributable to the normal increase of the sales of bulk additive products, recapture of sales of retail products after the clearance of the “poison capsules issue” in China during April to June 2012 and recovery of the deposit of $2,940,746 (RMB18,523,208) of special concession credits.

Excluding the recovery of special concession credits of $2,940,746 (RMB18,523,208), the contributions of our products as a percentage of invoiced value on sales for the nine months ended December 31, 2012 and 2011, respectively, are summarized below.

Nine months ended December 31,
	2012			2011
Retail products		23.57	%		55.07	%
Bulk additives		76.43	%		44.93	%
		100.00	%		100.00	%

Unit volume and unit prices comparatives (on the invoiced value of sales) for the nine months ended December 31, 2012 and 2011 are summarized below.

	Percentage increase (decrease) from the prior year
	Nine months ended December 31,
	2012									2011
	Unit volume			Selling prices			Overall increase / (decrease)			Unit Volume			Selling prices			Overall increase / (decrease)
Retail products		(35.96	)%		7.56	%		(31.12	)%		(66.14	)%		20.64	%		(59.15	)%
Bulk additives		160.95	%		7.65	%		180.92	%		(56.14	)%		(1.98	)%		(57.01	)%

Based on the invoiced value of sales, the bulk additive products invoiced sales contributions increased to 76.43% in the nine months ended December 31, 2012 from 44.93% in the nine months ended December 31, 2011. The increase was mainly attributable to the growth of the bulk additive products and the transition of the Company’s business model from primarily retail focused to primarily wholesale focused. The retail products sales decrease was mainly attributable to the occurrence of “poison capsule issue” in China during April to June 2012, as noted above.

Cost of sales

Cost of sales for the nine months ended December 31, 2012 was $23,833,844 compared with $16,656,068 for the nine months ended December 31, 2011. The increase in cost of sales was primarily caused by increase in sales for the nine months ended December 31, 2012.

Unit volume and unit costs comparatives for the nine months ended December 31, 2012 and 2011 are summarized below.

	Percentage increase (decrease) from the prior year
	Nine months ended December 31,
	2012									2011
	Unit volume			Unit Costs			Overall increase / (decrease)			Unit Volume			Unit Costs			Overall increase / (decrease)
Retail products		(35.96	)%		18.25	%		(24.27	)%		(66.14	)%		45.52	%		(50.72	)%
Bulk additives		160.95	%		85.69	%		152.92	%		(56.14	)%		(43.40	)%		(43.82	)%

Cost of product returns

As a result of a product returns after certain of our products did not meet our quality standards, and in order to improve the confidence of the Company’s distributors and end-user customers in our probiotics products, we provided special concession credits to our distributors during August 2011 to address the complaints and concerns of customers worried about food and healthcare products in the PRC. Such credits were made available for our distributors to reimburse end-user customers for products which were recalled. We treated these credits as being comparable to a warranty on our probiotics products, and we incurred a cost of $7,143,914 for these credits for the nine months ended December 31, 2011. No additional such credits were made available for the nine months ended December 31, 2012. During the nine months ended December 31, 2012, the Company recovered special concession credits amounting to $2,940,746 (RMB18,523,208) and recognized such amounts as sales for the period.

Gross profit

Gross profit increased by $26,669,836 or 227.74% to $38,380,635 for the nine months ended December 31, 2012, from $11,710,799 for the nine months ended December 31, 2011. The increase was mainly attributable to the increase in sales volume of bulk additive products, the recapture of sales of the retail products following the clearance of “poison capsule issue” and the recovery of special concession credits of $2,940,746 (RMB18,523,208) for the nine months ended December 31, 2012.

Selling expenses

Selling expenses increased by $4,932,692 or 114.27% to $9,249,502 or 14.87% of net sales for the nine months ended December 31, 2012, compared with $4,316,810 or 12.16% of net sales for the nine months ended December 31, 2011. The increase was mainly attributable to the issuance of sales commission to staff who engaged the sales and collection of outstanding balances from the customers.

General and administrative expenses

General and administrative expenses decreased by $831,329 or 7.03% to $10,994,795 or 17.67% of net sales for the nine months ended December 31, 2012, compared with $11,826,124 or 33.30% of net sales for the nine months ended December 31, 2011. The decrease in general and administrative expenses was mainly attributable to decrease in the write off of returned products of $865,871, allowance for doubtful accounts of $814,828 and salary payments and relevant expenses for the nine months ended December 31, 2012. During the nine months ended December 31, 2011, because the Company suspended production due to the implementation by the government of the PRC of new health and safety rules, $239,087 of original production costs such as salary payments and related expenses were charged as general and administrative expenses.

Income (loss) from operations

Income from operations increased by $22,568,473 to $18,136,338 for the nine months ended December 31, 2012, from loss from operations of $4,432,135 for the nine months ended December 31, 2011. The increase is mainly attributable to the increase in sales and increase of gross profit for the nine months ended December 31, 2012.

Total other income

Total other income increased by $1,482,053 or 283.92% to $2,004,049 for the nine months ended December 31, 2012, from $521,996 for the nine months ended December 31, 2011. The increase is mainly attributable to the investment income from a trust and is net of the relevant handling fee amounting to $2,325,218 and off-set the increase of interest expenses on loans to $477,101 for the nine months ended December 31, 2012.

Income taxes

Provision for income taxes was $3,425,743 and $899,175 for the nine months ended December 31, 2012 and 2011, respectively. The increase in the provision for income taxes is primarily attributable to increase in operating profit.

Net income (loss)

Net income increased by $21,523,958 to $16,714,644 for the nine months ended December 31, 2012 from net loss of $4,809,314 for the nine months ended December 31, 2011. The increase of net income is mainly attributable to the increase of income from operations of $22,568,473 stated above.

Segment reporting

We have adopted the “products and services” approach for segment reporting. For nine months ended December 31, 2012 and 2011, the management considers there to be two reporting segments: retail products and bulk additive products, as the new bulk production plant commenced operations in February 2010 with a separate production and distribution channel. There are also separate operational management teams and operations and marketing strategies for each segment. Therefore, we have used the segment reporting since fiscal year 2011.

Retail products

The results of retail products segment for the nine months ended December 31, 2012 and 2011 are summarized as below:

	Nine months ended December 31,
	2012		% of				2011	% of
	Amount		Net sales				Amount	Net sales
Net sales, retail products	$	16,913,709		100.00	%	$	19,556,575		100.00	%
Cost of sales		6,350,783		37.55	%		10,067,324		51.48	%
Cost of product returns		-		-			7,143,914		36.53	%
Gross profit, retail products		10,562,926		62.45	%		2,345,337		11.99	%
Operating expenses:
Selling expenses		2,926,690		17.30	%		2,405,691		12.30	%
General and administrative expenses		2,763,280		16.34	%		4,449,271		22.75	%
Total operating expenses		5,689,970		33.64	%		6,854,962		35.05	%
Income (loss) from operations, retail products	$	4,872,956		28.81	%	$	(4,509,625)		(23.06	)%

Net sales

Net sales in our financial statements are stated at invoiced value less sales discount and sales tax, and also included the return of deposits of $2,940,746 (RMB18,523,208) for recovery of special concession credits discussed below. Our net sales for the nine months ended December 31, 2012 and 2011 comprised the following:

	Nine months ended December 31,
	2012			2011
Invoiced value on sales	$	14,731,877		$	21,054,755
Less: Sales discount		(662,045	)		(1,349,479	)
Less: Sales tax		(96,869	)		(148,701	)
	$	13,972,963		$	19,556,575
Return of deposits		2,940,746			-
	$	16,913,709		$	19,556,575

Net sales decreased by $2,642,866 or 13.51% to $16,913,709 for the nine months ended December 31, 2012 from $19,556,575 for the nine months ended December 31, 2011. The decrease in sales of retail products is primarily attributable to the recapture of sales for the nine months ended December 31, 2011 after the adoption of the implementation of new rules and regulations on health care products by the government of the PRC during such period.

Cost of sales

Cost of sales decreased by $3,716,541 or 36.92% to $6,350,783 for the nine months ended December 31, 2012 from $10,067,324 for the nine months ended December 31, 2011. The decrease in cost of sales was primarily due to fewer product returns written off during the nine months ended December 31, 2012, as compared to the same period in the prior year.

Cost of product returns

As a result of a product returns after certain of our products did not meet our quality standards, and in order to improve the confidence of the Company’s distributors and end-user customers in our probiotics products, we provided special concession credits to our distributors during August 2011 to address the complaints and concerns of customers worried about food and healthcare products in the PRC. Such credits were made available for our distributors to reimburse end-user customers for products which were recalled. We treated these credits as being comparable to a warranty on our probiotics products, and we incurred a cost of $7,143,914 for these credits for the nine months ended December 31, 2011. No additional such credits were made available for the nine months ended December 31, 2012. During the nine months ended December 31, 2012, the Company recovered special concession credits amounting to $2,940,746 (RMB18,523,208) and recognized such amounts as sales for the period.

Gross profit

Gross profit increased by $8,217,589 or 350.38% to $10,562,926 for the nine months ended December 31, 2012 from $2,345,337 for the nine months ended December 31, 2011. The increase in gross profit was primarily caused by the increase of products sold and no write-off of a special payment to distributors for the current period, which was occurred, described above, for the nine months ended December 31, 2011.

Selling expenses

Selling expenses were $2,926,690 or 17.30% of net sales for the nine months ended December 31, 2012, compared with $2,405,691 or 12.30% of net sales for the nine months ended December 31, 2011. The selling expenses mainly included salary and advertising expenses. This increase in selling expenses was primarily attributable to an increase in sales promotion activities.

General and administrative expenses

General and administrative expenses decreased by $1,685,991 or 37.89% to $2,763,280 or 16.34% of net sales for the nine months ended December 31, 2012 compared with $4,449,271 or 22.75% of net sales for the nine months ended December 31, 2011. The decrease in general and administrative expenses was mainly attributable to an allowance of accounts receivable for the returned products of $865,871, allowance for doubtful accounts of $656,907 and expenses transferring from production costs of $239,087 as the suspension of production for the nine months ended December 31, 2011.

Income (loss) from operations

Income from operations increased by $9,382,581 to $4,872,956 for the nine months ended December 31, 2012 from a loss from operations of $4,509,625 for the nine months ended December 31, 2011. The increase is mainly attributable to increases in revenues and a decrease in operating expenses for the nine months ended December 31, 2012, and the write off of returned products incurred for the nine months ended December 31, 2011, which did not occur in the nine months ended December 31, 2012.

Bulk products

The results of bulk additives products segment for the ~~three~~nine months ended ~~June~~December 3031, 2012 and 2011 are summarized as below:

	Three months ended June 30,
	Nine months ended December 31,
	2012 Amount		% of Net sales			2011 Amount		% of Net sales
Net sales, bulk additives products	$	1445,~~878~~300,~~385~~770		100.00	%	$	415,~~417~~954,~~128~~207		100.00	%
Cost of sales		517,~~996~~483,~~734~~062		4038.3159	%		16,~~881~~588,~~075~~744		4241.5930	%
Gross profit, bulk additives products		827,~~881~~817,~~651~~708		5961.6941	%		29,~~536~~365,~~053~~463		5758.4170	%
Operating expenses:
Selling expenses		36,~~130~~322,~~376~~812		2113.0496	%		~~837~~1,~~098~~911,120		1811.9598	%
General and administrative expenses		15,~~574~~326,~~127~~266		1011.5876	%		14,~~608~~615,~~627~~758		3628.4293	%
Total operating expenses		411,~~704~~649,~~503~~078		3125.6271	%		26,~~445~~526,~~725~~878		5540.3791	%
Income from operations, bulk additives products	$	416,~~177~~168,~~147~~630		2835.0869	%	$	902,~~328~~838,585		217.0479	%

Net sales

Net sales in our financial statements are stated at invoiced value less sales discount and sales tax. Our net sales for the ~~fiscal~~nine ~~years~~months ended December 31, 2012 and 2011 comprised the following:

	Three months ended June 30,
	Nine months ended December 31,
	2012			2011
Invoiced value on sales	$	1445,~~991~~611,~~818~~044		$	416,~~431~~029,~~889~~036
Less: Sales tax		(~~113~~310,~~433~~274	)		(1474,~~761~~829	)
	$	1445,~~878~~300,~~385~~770		$	415,~~417~~954,~~128~~207

Net sales increased by $1029,~~461~~346,~~257~~563 or ~~236~~183.8394% to $1445,~~878~~300,~~385~~770 for the ~~three~~nine months ended ~~June~~December 3031, 2012, from $415,~~417~~954,~~128~~207 for the ~~three~~nine months ended ~~June~~ 30December 31, 2011. The increase in sales of bulk additive products is primarily attributable to the ~~normal~~ growth of the business and market demand for ~~additive~~the bulk products.

Cost of sales

Cost of sales increased by $410,~~115~~894,~~659~~318 or ~~218~~165.7935% to $517,~~996~~483,~~734~~062 for the ~~three~~nine months ended ~~June~~December 3031, 2012, from $16,~~881~~588,~~075~~744 for the ~~three~~nine months ended ~~June~~ 30December 31, 2011. The increase in cost of sales was primarily caused by the increase in products sold for the ~~three~~nine months ended December ~~June 30~~31, 2012.

Gross profit

Gross profit increased by $618,~~345~~452,~~598~~245 or ~~250~~197.2202% to $827,~~881~~817,~~651~~708 for the ~~three~~nine months ended ~~June~~December 3031, 2012, from $26,~~536~~588,~~053~~744 for the ~~three~~nine months ended ~~June~~ 30December 31, 2011. The increase of gross profit was primarily caused by the increase in products sold for the ~~three~~nine months ended December ~~June 30~~31, 2012.

Selling expenses

Selling expenses were $36,~~130~~322,~~376~~812 or 2113.0496% of net sales for the ~~three~~nine months ended ~~June~~December 3031, 2012, compared with $~~837~~1,~~098~~911,120 or 1811.9598% of net sales for the ~~three~~ nine months ended ~~June~~December 3031, 2011. The selling expenses mainly included advertising expenses, promotion expenses, commission ~~and~~ and salary. This increase in selling expenses was primarily attributable to increase of commission to $23,~~334~~870,~~563~~980 and advertising expenses to $1,164,538 for the ~~three~~nine months ended ~~June~~December 3031, 2012.

General and administrative expenses

General and ~~administrative~~ administrative expenses were $15,~~574~~326,~~128~~266 or 1011.5876% of net sales for the ~~three~~nine months ended ~~June~~December 3031, 2012, compared with $14,~~608~~615,~~627~~758 or 3628.4293% of net sales for the ~~three~~nine months ended ~~June~~December 3031, 2011. The increase in general and administrative expenses was mainly attributable to an increase inof depreciation charges to $~~283~~875,~~802~~441 for the ~~three~~nine months ended ~~June~~December 3031, 2012 from $~~167~~577,~~196~~022 for the ~~three~~nine months ended ~~June~~December 3031, 2011.

Income from operations

Income from operations increased by $413,~~086~~330,~~818~~045 or 45469.60% ~~times~~ to $416,~~177~~168,~~147~~630 for the ~~three~~nine months ended ~~June~~December 3031, 2012, from $902,~~328~~838,586 for the ~~three~~nine months ~~ended~~ ~~June~~ended 30December 31, 2011. The increase is mainly attributable to the increase of gross profit of $618,~~345~~452,~~598~~245 from the increase in sales ~~and~~ net of the increase in selling expenses, and general and administrative expenses, for the ~~three~~nine months ended ~~June~~December 3031, 2012 stated above.

Liquidity and Capital Resources

Liquidity

We had cash of $5068.75 million and working capital of $4151.01 million as of ~~June~~December 3031, 2012 and cash of $70.0 million and working capital of $57.2 million as of March 31, 2012.

Our statements of cash flow for the ~~three~~nine months ended ~~June~~December 3031, 2012 and 2011 are summarized as below:

	Three months ended June 30,
	Nine months ended
	December 31,
	2012			2011
Net cash provided by operating activities	$	2,237,410		$	12,010,256
Net cash provided by (used in) operating activities	$	21,459,182		$	(1,618,210	)
Net cash used in investing activities		(2027,~~931~~342,~~411~~719	)		(123,~~124~~709,~~347~~038	)
Net cash (used in) provided by financing activities		(681,442	)		4,445,433
Net cash provided by financing activities		3,661,021			4,509,554
Effect of exchange rate changes on cash		~~(41~~586,~~315~~664	)		(1,~~571~~172,~~418~~532	)
Net change in cash and cash equivalents balances	$	(191,~~416~~635,~~758~~852	)	$	13(21,~~759~~990,~~924~~226	)

Operating activities

Net cash provided by operating activities was $221.15 million and net cash used in operating activities of $121.06 million for the ~~three~~nine months ended ~~June 30~~December 31, 2012 and 2011, respectively. The primary reason for the ~~decrease~~increase in cash flow was aan ~~decrease~~increase in ~~collection~~net ofincome ~~accounts receivable~~ for the ~~periods~~nine months ended December 31, ~~which~~2012 ~~were~~to $216.87 million ~~and~~, compared with the net loss of $204.98 million for the ~~three~~nine months ended ~~June~~December 3031, ~~2012 and~~ 2011~~, respectively~~.

Because of the adverse market environment, including the “poison capsule issue”, the Company temporarily extended credit terms of up to 120 days’ credit to all distributors and customers, and as a result, our operating cash inflow was delayed. Our customers, however have historically been large distributors with whom we have done business for a number of years, and so our cash flows from our existing business have been, and we expect them to continue to be, fairly reliable.

Investing activities

We had capital expenditures totaling $2027.93 million for the ~~three~~nine months ended ~~June~~December 3031, 2012, primarily related to the prepayment of $1213.28 million for certain capital expenditures with respect to our facility in Yangling and $813.75 million in the acquisition of property, plant and equipment in Yangling, Qingpu and Shining.

Financing activities

Cash provided from financing activities was $123.27 million ~~for the three months ended June 30, 2012,~~ and ~~we used net cash of~~ $254.5 million infor ~~financing activities in~~ the ~~three~~nine months ended ~~June~~December 3031, 2012 and 2011, respectively. Details of our financing activities for such periods are as follows:

	Three months ended June 30,
	Nine months ended December 31,
	2012			2011
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of loan	$	(792,670	)	$	-
Proceeds of loans	$	20,197,201		$	-
Advance from director		111,228			4,445,433
Repayment of loans		(12,245,547	)		-
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES	$	(681,442	)	$	4,445,433
(Repayment to) advance from director		(4,290,633	)		4,509,554
NET CASH PROVIDED BY FINANCING ACTIVITIES	$	3,661,021		$	4,509,554

The net cash used in financing activities for the three months ended June 30, 2012 was primarily from the repayment of a bank loan of $792,670 (RMB 5 million) net of an advance from a director to the Company amounting to $111,228.34

The net cash provided by financing activities for the ~~three~~nine months ended ~~June~~December 3031, ~~2011~~2012 was ~~derived~~ primarily from anthe ~~advance~~proceeds ~~from~~of bank loans of $20.2 million (RMB 127 million) net of the repayment of a ~~director~~bank loan of $12.2 million (RMB 77 million) and minus net repayment to ~~the~~a ~~Company amounting~~director amounting to $4.43 million.

~~During~~The ~~the~~net ~~periods~~cash provided ~~ended~~by ~~June~~financing ~~30,~~activities ~~2012~~for ~~and 2011,~~ the ~~advance~~nine ~~from~~months aended ~~director,~~December ~~Mr. Song Jinan~~31, 2011 was ~~entered~~primarily ~~into because~~ of ~~the~~an ~~difficulty~~advance ~~the~~from ~~Company faced~~a indirector ~~paying~~amounting ~~expenses~~to ~~incurred~~$4.5 million ~~outside China in non-PRC currency due~~ to the ~~difficulties the~~ Company ~~had in converting currency because of foreign exchange controls~~.

29During the periods ended December 31, 2012 and 2011, the advance from a director, Mr. Song Jinan, was entered into because of the difficulty the Company faced in paying expenses incurred outside China in non-PRC currency due to the difficulties the Company had in converting currency because of foreign exchange controls.

Commitments

Capital commitments

On August 12, 2010, BDH, a subsidiary of the Company, entered into agreements with a government agency to establish manufacturing facilities for animal probiotics products in the Yangling Agricultural High-tech Industries Demonstration Zone in Shaanxi Province of China. In furtherance of such agreements, BDH incorporated a foreign, wholly owned subsidiary, Growing Yangling, with a registered capital of $50 million. As of ~~June~~December 3031, 2012, the Company had injected into Growing Yangling $7.5 million as registered capital. According to the approval from the government agency dated October 12, 2010, the remaining balance of Growing Yangling’s registered capital of $42.5 million must be injected before July 13, 2013.

The cost for constructing the Yangling facility is expected to be over $58 million invested over two years, which would be mainly facilitated by the capital injection from BDH. The facility will produce probiotics and probiotics-related biological additives for the animal feed industry. Currently, the facility is in its construction stage. During the year ended March 31, 2011, the Company made total payment of approximately $3.25 million (RMB 20,608,112) to acquire the land use right of approximately 122,600 square meters (183.94 mu). We received the land certificate on January 28, 2012 and commenced construction in ~~June~~September 2012. We expect to complete construction by ~~June~~ September 2014. As of ~~June~~December 3031, 2012, Growing Yangling entered into agreements with contractors related to the construction of the plant, ~~manufacturing~~ manufacturing facilities and purchase of production equipment for future payment of $2,~~552~~548,~~627~~547 and $21,~~965~~929,~~081~~973, respectively.

Shining also entered into agreements with contractors for initial work on the project in the amount of $125,917, which had not been paid as of June 30, 2012.

On February 1, 2012, our subsidiary, Growing, entered into an agreement to acquire a patent relating to a production technology for $6,647,147 (RMB 42,000,000) from an unrelated PRC company. Growing made a deposit of $6,330,616 (RMB 40,000,000) to the seller for the transfer of the patent within 210 days, or by August 30, 2012. The original terms of the agreement were that if the patent cannot be transferred to Growing within 210 days, Growing will be refunded the deposit paid and also be compensated an additional $159,000 (RMB 1,000,000) for damages. The transfer was not completed by August 30, 2012, and on September 3, 2012, Growing and the seller mutually agreed to extend the completion date to December 30, 2012. As of December 21, 2012, the transfer had not yet been completed because the Company is waiting for approval of the transfer from the State Intellectual Property Office of the PRC. The Company has no information to allow it to estimate when such confirmation will be obtained, but expects the transaction to close in 2013, after which the patent is planned to be used in the Company’s operations. Subject to the completion of the transfer of the patent, the Company will have to pay the balance, the future payment of which amounts to $317,012 (RMB2 million), which amount was contracted but not provided for as of June 30, 2012.

Purchase obligations

Shining and Growing have entered into agreements with suppliers to purchase raw materials and packing materials, with respect to which the amount of future payments is $169,~~140~~201,~~442~~614.

Other Obligations

Growing entered into an agreement with a university in the PRC to perform research and development. The amount of future payments is $1,~~424~~428,~~389~~322 (RMB9 million).

Inflation

We believe that inflation has not had a material impact on our results of operations for the ~~three~~nine months ended ~~June~~December 3031, 2012 and 2011.

Seasonality

Regarding our retail products, many of our customers purchase our products as gifts during the Chinese festivals and holidays, and the seasonal effect is correlated to these holidays during the year. For the first two fiscal quarters, there are no major Chinese festivals or holidays, except for the Dragon Boat Festival (June) and mid-Autumn Festival (September). However, in the last two fiscal quarters, there are some major Chinese festivals and holidays, including National Day (October), Christmas (December), New Year’s ~~Day~~ (January), ~~and~~ and Chinese New Year (January to February).

With respect to our bulk additive products, while it is still too early to tell, we expect that our bulk additives sales will not be seasonal in nature because the bulk products are purchased by food manufacturers consistently over the year. Except for the possibility of the PRC government implementing from time to time new or different rules and regulations for the food industry, including with respect to additives and related products, we are not aware of and do not foresee any seasonal effects on our bulk additive products business.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Critical Accounting Policies

Our critical accounting policies are described in the Notes to the Financial Statements included in our Annual Report filed with the SEC on Form 10-K for the fiscal year ended March 31, 2012, and this Form 10-Q should be read in conjunction with that Annual Report. This MD&A discusses our consolidated financial statements for the three months ended ~~June~~December 3031, 2012 and 2011. These financial statements have been ~~prepared~~ prepared in accordance with generally accepted accounting principles in the United States. In preparing these financial statements, we are required to make estimates and assumptions affecting the reported amounts of assets and liabilities and the disclosure of ~~contingent~~ contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates and judgments on historical ~~experience~~ experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Those estimates and assumptions include estimates for allowance for doubtful accounts, inventory valuation, impairment consideration, assumptions used in the valuation of derivative liabilities, and estimates for potential penalties for late payment of taxes.

Revenue Recognition

Revenues of the Company are from the sale of our probiotics products. We recognize revenue from the sale of goods when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the sales price is fixed or determinable; and (4) collectability is reasonably assured. Revenues are presented net of value added tax (“VAT”). In our revenue arrangements, physical delivery is the point in time when customer acceptance occurs since title and risk of loss are transferred to the customer.

Stock based compensation

The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board, whereas the value of the award is measured on the date of grant and recognized over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the Financial Accounting Standards Board, whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.

The fair value of the Company’s common stock option grant is estimated using the Black-Scholes-Merton option pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the common stock options, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton option pricing model, and based on actual experience. The assumptions used in the Black-Scholes-Merton option pricing model could materially affect compensation expense recorded in future periods.

Use of estimates as applied to potential penalties for the late payment of taxes

In addition to the PRC Enterprise Income Tax (“EIT”), companies in the PRC that are engaged in the sale of goods are generally required to pay value added taxes (“VAT”) at a rate of 17% of the gross sales proceeds received, less any deductible VAT already paid or borne by the taxpayer.

Our management believes that our operations in China were exempted from EIT and VAT for all years prior to 2005 because we had been recognized by the local government as an advanced technology enterprise. However, the Company never received a written confirmation from the appropriate tax authorities for the tax exemption status of our operations in China prior to 2005. As a result, there is no way to ascertain the ultimate position which may be taken by the relevant PRC tax authorities in the future and accordingly, full provisions for tax liabilities in the amount of $12,734,640, for all years prior to 2005 have been recorded by the Company. Beginning in January 2006, we made tax payments to the PRC tax authorities for 2005 and we have made regular tax payments to the PRC tax authorities for all subsequent periods.

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For the ~~three~~nine months ended ~~June~~December 3031, 2012, management made an assessment of whether it was necessary to provide a further provision for interest ~~and~~ and penalties on these unpaid amounts. Management determined that no further provision for interest and penalties was necessary ~~given~~ given the unlikelihood of payment of the amount already accrued and provided in the financial statements. This assessment was based ~~upon~~ upon receipt by the company of a report by an independent tax expert that the amount of taxes prior to 2005 may not be payable, ~~the~~ the length of time the amount has been outstanding, and that there have been no requests from PRC tax authorities for payment of ~~the~~ the unpaid taxes outstanding amounts. As such, management believes that the previously recorded amounts are sufficient to cover ~~any~~ any settlement of this liability.

Recent Accounting Pronouncements

See Note 2 to the Notes to the Unaudited Condensed Consolidated Financial Statements for the Three and Nine months Ended ~~June~~December 3031, 2012.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Interest Rates Risk

Our exposure to interest rate risk for changes in interest rates relates primarily to the interest-bearing bank loans and interest income generated by our bank deposits. We have not used any derivative financial instruments in our investment portfolio or for cash management purposes. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed nor do we anticipate being exposed to material risks due to changes in interest rates. Nevertheless, our future interest expense or interest income may expect to be decreased due to changes in interest rates in the PRC.

Foreign Exchange Rates Risk

We do not hold any derivative instruments and do not engage in any hedging activities. Because most of our purchases and sales are made in RMB, any exchange rate change affecting the value of the RMB relative to the U.S. Dollar could have an effect on our financial results as reported in U.S. Dollars. If the RMB were to depreciate against the U.S. Dollar, amounts reported in U.S. Dollars would be correspondingly reduced. If the RMB were to appreciate against the U.S. Dollar, amounts reported in U.S. Dollars would be correspondingly increased.

ITEM 4. CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

In a letter to the Company on January 9, 2012, the SEC concluded that the Company’s lack of U.S. GAAP experience is a material weakness in our disclosure controls and procedures. The SEC required the Company to include disclosure about this material weakness in subsequent filings. For information on the Company’s correspondence with the SEC with respect to the Company’s internal controls over financial reporting, see “– Management’s Quarterly Report on Internal Control over Financial Reporting” below.

Since the SEC’s letter of January 9, 2012, the Company has endeavored to address the concerns raised by the SEC. The Company’s Audit Committee and our management are still engaged in discussions about how best to rectify fully the material weakness in our disclosure controls and procedures. The Audit Committee has recommended that the Company hire additional qualified personnel to prepare the Company’s books and records and financial statements in accordance with U.S. GAAP. The Company has retained the services of an accounting professional to perform our internal audit and assist with SEC compliance for purposes of all future reporting. Management believes that these remediation measures have improved and will materially improve the Company’s disclosure controls and procedures for periods subsequent to March 31, 2012, and that the corresponding material weaknesses are being addressed with respect to periods subsequent to March 31, 2012.

An evaluation was performed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our management, including our principal executive officer and principal financial officer, concluded that, as of such date, our disclosure controls and procedures were not effective and suffered from a material weakness because of the Company’s lack of training and/or experience with preparing financial statements in accordance with U.S. GAAP.

Management’s Quarterly Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of published financial statements in accordance with generally accepted accounting principles. However, because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or the degree of compliance with policies may deteriorate.

In a letter dated January 7, 2011, the SEC commented on the Company’s Annual Report on Form 10-K for Fiscal Year ended March 31, 2010 and Quarterly Report for the Period Ended September 30, 2010. The SEC asked the Company a number of questions about how we prepare financial statements and how we assess our internal controls over financial reporting. The Company replied to the SEC’s comment letter on February 16, 2011, and the SEC and the Company subsequently exchanged numerous comment and reply letters, respectively, through January 9, 2012. In a letter to the Company on that date, the SEC concluded that the Company’s lack of U.S. GAAP experience is a material weakness in our internal control over financial reporting. For information on the Company’s correspondence with the SEC with respect to the Company’s disclosure controls and procedures, see “Disclosure Controls and Procedures” above.

In reaching such decision, the SEC concluded that those primarily responsible for the preparation of the Company’s books and records and financial statements do not have the requisite U.S. GAAP experience to prepare financial statements in accordance with U.S. GAAP. The SEC noted that the Company’s former and interim Chief Financial Officers do not hold a license such as that of a Certified Public Accountant in the U.S. and have not attended U.S. institutions or extended educational programs that would provide sufficient relevant education relating to U.S. GAAP; the SEC also noted that most of the U.S. GAAP audit experience, if any, of the Company’s former and interim Chief Financial Officers consists of audits of subsidiary financial information that supports or is included in the U.S. GAAP financial statements of parent registrants. The SEC also noted that the Company’s retention of a consultant to assist with the preparation and fulfillment of all SEC and U.S. GAAP reporting requirements was further evidence that our accounting department does not possess the requisite U.S. GAAP knowledge to prepare financial statements in accordance with U.S. GAAP. The SEC required the Company to file an amended Annual Report on Form 10-K for the year ended March 31, 2010 disclosing such material weakness, which the Company intends to file as promptly as is reasonably practicable, and also required the Company to include disclosure about this material weakness in subsequent filings.

Since the SEC’s letter of January 9, 2012, the Company has endeavored to address the concerns raised by the SEC. The Company’s Audit Committee and our management are still engaged in discussions about how best to rectify fully the material weakness in our internal control over financial reporting. The Audit Committee has recommended that the Company hire additional qualified personnel to prepare the Company’s books and records and financial statements in accordance with U.S. GAAP. The Company has retained the services of an accounting professional to perform our internal audit and assist with SEC compliance for purposes of all future reporting. Management believes that these remediation measures have improved and will materially improve the Company’s internal control over financial reporting for periods subsequent to March 31, 2012, and that the corresponding material weaknesses are being addressed with respect to periods subsequent to March 31, 2012.

Management is continuing its review of the Company’s internal control over financial reporting as it believes the following material weaknesses still exist: (i) a lack of senior management personnel who have the requisite U.S. GAAP experience to prepare financial statements in accordance with U.S. GAAP; (ii) the Company did not maintain an adequate financial reporting organizational structure (in part due to the turnover of the executives in the CFO and Interim CFO positions) to support the complexity and operating activities of the Company resulting in a weakness in efficiency and controls related to the financial statement closing process; and (iii) the Company may not have maintained sufficiently consistent corporate governance (including proper recording of minutes of meetings and decisions of the Company’s Board of Directors) and financial controls to ensure proper delegation of authority limits and timeliness of Board approval for significant transactions. However, the Company has taken steps described above to remediate these deficiencies.

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Inherent Limitations on the Effectiveness of Controls

Management does not expect that the Company’s disclosure controls and procedures or its internal controls over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of internal control over financial reporting can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been or will be detected.

These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

The Company and certain of its current and former officers and directors have been named as defendants in three putative shareholder class action lawsuits, one in the United States District Court for the Central District of California (Mohapatra v. China-Biotics, Inc., et al., No. 10-cv-6954 (C.D. Cal.), the “Mohapatra case”), and two in the United States District Court for the Southern ~~District~~ District of New York (Hill v. China-Biotics, Inc., et al., No. 10-cv-7838 (S.D.N.Y.), the “Hill case”, and Casper v. Jinan, et al., No. 12-cv-4202 (S.D.N.Y.), the “Casper case”). After certain shareholders filed motions for appointment as lead plaintiff, the plaintiff in the Mohapatra case voluntarily dismissed its case and the plaintiff in the Hill case, together with another shareholder, were appointed as lead plaintiffs. The lead plaintiffs filed an amended complaint in which they allege that the defendants violated Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making material misstatements or failing to disclose certain material information regarding, among other things, the Company’s financial condition, operations, and future business prospects, and the quality, nature, and quantity of the Company’s retail outlets. The lead plaintiffs seek to represent a class of shareholders who bought the Company’s securities between July 10, 2008 and August 27, 2010.

ITEM 1A. RISK FACTORS.

Not required for a smaller reporting company.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

As discussed further in the report of our management included under Item 4. “Controls and Procedures” of Part I of this Quarterly Report on Form 10-Q, after reviewing our Annual Report on Form 10-K for the year ended March 31, 2010 and our Quarterly Report on Form 10-Q for the period ended December 31, 2010, the SEC concluded in a letter to the Company dated as of January 9, 2012, that the Company’s lack of U.S. GAAP experience is a material weakness in our disclosure controls and procedures and in our internal control over financial reporting. In its letter, the SEC also directed the Company to file an amended Form 10-K for the year ended March 31, 2010 identifying the Company’s lack of U.S. GAAP experience as a material weakness in our disclosure controls and procedures and in our internal control over financial reporting, which the Company intends to file as promptly as is reasonably practicable.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

Number		Exhibit
3.1		Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to China-Biotics, Inc.’s Form 8-K filed on March 23, 2006).

3.2		Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to China-Biotics, Inc.’s Form 8-K filed on March 23, 2006) as amended by the Amendment to the Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to China-Biotics, Inc.’s Form 10-Q filed on November 10, 2008).

10.1		Securities Exchange Agreement dated March 22, 2006 (incorporated by reference to Exhibit 10.1 to China-Biotics, Inc.’s Form 8-K filed on March 23, 2006).

10.2		Form of Lockup Agreement dated March 22, 2006 (incorporated by reference to Exhibit 10.2 to China-Biotics, Inc.’s Form 8-K filed on March 23, 2006).

10.3		Put Agreement dated March 22, 2006 (incorporated by reference to Exhibit 10.3 to China-Biotics, Inc.’s Form 8-K filed on March 23, 2006).

10.4		Registration Rights Agreement dated March 22, 2006 (incorporated by reference to Exhibit 10.4 to China-Biotics, Inc.’s Form 8-K filed on March 23, 2006).

10.5		Investors’ Rights Agreement dated March 22, 2006 (incorporated by reference to Exhibit 10.5 to China-Biotics, Inc.’s Form 8-K filed on March 23, 2006).

10.6		Stan Ford Agreement dated March 22, 2006 (incorporated by reference to Exhibit 10.6 to China-Biotics, Inc.’s Form 8-K filed on March 23, 2006).

10.7		Summary of English translation of Investment Agreement for lease of land dated March 21, 2006 (incorporated by reference to Exhibit 10.7 to China-Biotics, Inc.’s Form 8-K filed on March 23, 2006).

10.8		Escrow Agreement dated March 22, 2006 (incorporated by reference to Exhibit 10.8 to China-Biotics, Inc.’s Form 10-KSB filed on June 30, 2006).

10.9		Stock Purchase Agreement with Fred Cooper dated February 6, 2006 (incorporated by reference to Exhibit 10.9 to China-Biotics, Inc.’s Form 10-KSB filed on June 30, 2006).

10.10		Loan agreement dated as of September 22, 2005 (incorporated by reference to Exhibit 10.10 to China-Biotics, Inc.’s Form 10-KSB filed on June 30, 2006).

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10.11		Convertible Bond dated as of September 22, 2005 (incorporated by reference to Exhibit 10.11 to China-Biotics, Inc.’s Form 10-KSB filed on June 30, 2006).
10.12		Subscription Agreement dated as of September 22, 2005 (incorporated by reference to Exhibit 10.12 to China-Biotics, Inc.’s Form 10-KSB filed on June 30, 2006).
10.13		English Translation of Equity Transfer Agreement dated August 11, 2005 (incorporated by reference to Exhibit 10.13 to China-Biotics, Inc.’s Form SB-2/A filed on April 27, 2007).
10.14		English Translation of Subscription Agreement dated August 11, 2005 (incorporated by reference to Exhibit 10.13 to China-Biotics, Inc.’s Form SB-2/A filed on April 27, 2007).
10.15		Investment Agreement dated December 11, 2007 (incorporated by reference to Exhibit 10.1 to China-Biotics, Inc’s Form 8-K filed on December 12, 2007).
10.16		Registration Rights Agreement dated December 11, 2007 (incorporated by reference to Exhibit 10.2 to China-Biotics, Inc.’s Form 8-K on December 12, 2007).
10.17		4% Senior Convertible Promissory Note dated December 11, 2007 (incorporated by reference to Exhibit 10.3 to China-Biotics, Inc.’s Form 8-K filed on December 12, 2007).
10.18		Guaranty by Song Jinan in favor of Pope Investments II LLC dated December 11, 2007 (incorporated by reference to Exhibit 10.5 to China-Biotics, Inc.’s Form 8-K filed on December 12, 2007).
10.19		Pledge Agreement between Song Jinan and Pope Investments II LLC dated December 11, 2007 (incorporated by reference to Exhibit 10.5 to China-Biotics, Inc.’s Form 8-K filed on December 12, 2007).
10.20		Form of Purchase Agreement dated January 21, 2009 (incorporated by reference to Exhibit 10.15 to China-Biotics, Inc.’s Form 10-Q filed on February 13, 2009).
10.21		Form of Purchase Agreement dated May 19, 2009 (incorporated by reference to Exhibit 10.1 to China-Biotics, Inc.’s Form 8-K filed on May 20, 2009).
10.22		Share Charge dated September 21, 2009 (effective as of January 24, 2008) (incorporated by reference to Exhibit 10.22 to China-Biotics, Inc.’s Form 10-Q filed on November 16, 2009).
10.23		Underwriting Agreement dated September 29, 2009 (incorporated by reference to Exhibit 1.1 to China-Biotics, Inc.’s Form 8-K filed on September 30, 2009).
10.24		District Entrance Project Agreement dated August 12, 2010 (incorporated by reference to Exhibit 10.19 to China-Biotics, Inc.’s Form 10-Q filed on February 14, 2011).
10.25		2010 Equity Incentive Plan (incorporated by reference to Exhibit 4.1 to China-Biotics, Inc.’s Registration Statement on Form S-8 filed on March 11, 2011).
14.1		Code of Ethics (incorporated by reference to Exhibit 14.1 to China-Biotics, Inc.’s Form 10-KSB for the year ended March 31, 2006).
16.1		Letter dated April 13, 2006 from Malone & Bailey PC to the United States Securities and Exchange Commission (incorporated by reference to Exhibit 16.1 to China-Biotics, Inc.’s Form 8-K filed on May 31, 2006).
16.2		Resignation Letter of BDO Limited, dated June 22, 2011 (incorporated by reference to Exhibit 16.1 to China-Biotics, Inc.’s Form 8-K filed on June 23, 2011).
23.1		Letter from BDO Limited, dated June 23, 2011, to the United States Securities and Exchange Commission (incorporated by reference to Exhibit 16.2 to China-Biotics, Inc.’s Form 8-K filed on June 23, 2011).
23.2		Letter from Thornhill Capital LLC to the United States Securities and Exchange Commission, dated September 10, 2012 ~~(incorporated by reference to Exhibit 16~~.~~3 to China-Biotics, Inc.’s Form 10-K filed on September 14, 2012).~~
31.1		Certification of CEO pursuant to Rule 13a-14(a)/15(d)-14(a).
31.2		Certification of CFO pursuant to Rule 13a-14(a)/15(d)-14(a).
32.1		Certification of CEO pursuant to Section 1350.
32.2		Certification of CFO pursuant to Section 1350.

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31.1		Certification of CEO pursuant to Rule 13a-14(a)/15(d)-14(a).
31.2		Certification of CFO pursuant to Rule 13a-14(a)/15(d)-14(a).
32.1		Certification of CEO pursuant to Section 1350.
32.2		Certification of CFO pursuant to Section 1350.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CHINA-BIOTICS, INC. By: /s/ ~~Mr.~~ Song Jinan Mr. Song Jinan Chairman of the Board, Chief Executive Officer, Treasurer and Secretary (Principal Executive Officer)

Pursuant to the requirements of Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on ~~January~~February 414, 2013.

/s/ Song Jinan		Chairman of the Board and Chief Executive Officer
Song Jinan		(Principal Executive Officer)

/s/ Yan Yihong		Chief Financial Officer
Yan Yihong		(Principal Financial and Accounting Officer)

/s/ Chin Ji Wei		Director
Chin Ji Wei

/s/ Du Wen Min		Director
Du Wen Min

/s/ Ivan Chu		Director
Ivan Chu

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